Rate Quotes

Based on the forward rate quote you obtained, and the interest rate information you get, are there any carry trade strategies that are profitable?

Currency trade is considered to be an extremely risky practice, however if executed properly, can pay out a lucrative return for an investor. It appears to be a prime example of the risk/reward trade-off that is at the foundation of the finance world as we know it today.

According to Investopedia.com, Currency Carry Trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. The idea is to capture the difference between the two interest rates, which has the potential to be substantial, contingent on the amount of leverage used. (Currency Carry Trade, 2015)

Based on the forward rate quotes obtained from www.fxstreet.com and the interest rate information from worldinterestrates.info, there are some carry trade strategies that are profitable. Figure 1 in Appendix represents a chart with the prevailing interest rates for some of the major countries that are highlighted in the spot and forward rates chart. It would be beneficial to borrow money in Swiss Franc considering the fact that there is currently a 0% interest rate associated with the currency. An investor would be “borrowing cheap”. If the money were invested in another country with a higher interest rate such as Europe (due to the highest interest rate out of the countries at 0.75%), they would be able to capitalize off of the difference in the interest rates from the different countries.

If you are a SWISS investor and have 10 million CHF to invest, show using actual calculations your carry trade strategies, Profit and the risks?

Below is a calculation, along with assumptions, that demonstrate the profitability that is derived from carry trade strategies.

Assumptions:

Past Interest rates prevail for the future

Leverage is 10:1 ratio

Investor capital is $1,000,000 CHF

CHF will be converted to Euros

1 CHF changes to €1.0256 when assessing risk

Calculating Profit

Borrow 9,000,000 CHF from Switzerland at 0% interest rate.

9,000,000 CHF invested at 0% interest = 9,000,000 CHF repaid at the end of the year

Convert CHF to Euros (Using FX Rates from wsj.com)

1 CHF = €0.9647

1.037 CHF/€

10,000,000