This study tests the validity of the uncovered interest parity. This parity condition states, that the difference in interest rates between two countries, is equal to the expected change in the exchange rate between the two currencies. According to this, the return from engaging in carry trading, that is, taking a short position in a low-interest-rate currency and investing the proceeds in a high interest rate currency, must equal zero. In accordance to the majority of previous studies testing the validity of the uncovered interest rate parity, this study shows that investing in carry trading, does indeed yield a positive return over the specified timeframe. Furthermore, the risk adjusted profit, measured by the Sharpe ratio, is found to be superior to that of investing in the stock index S&P 500. Finally, the effect of the current financial crisis is analysed. The results show, that profits are drastically reduced and volatility increased, by including the previous 3 years in the timeframe for the analysis. Nevertheless, carry trading still presents itself, as an attractive and profitable investment alternative, even when analysed over a timeframe, that includes both prosperity and a drastic market downturn as characterized by the current financial crisis.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||80|