[Related to Solved Problem 5.2a] An anonymous billionaire investor was quoted in the Wall Street Joumal...
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[Related to Solved Problem 5.2a] An anonymous billionaire investor was quoted in the Wall Street Joumal as asking: "Has there ever been a carry trade that hasn't ←ended badly? Source: Robert Frank, "Where Billionaires Are Puting Their Money" Wall Street Journal, September 15, 2010. What is a carry trade? OA The term implies an average of the expected short-term interest rates over the life of a long-term investment will be roughly equal to the interest rate on the long-term investment. OB. The term implies the gap between the rate at which an average investor can borrow and the rate at which the investor could invest in Treasury bonds or other long-term bonds is likely to be equal. OC. The term is sometimes used to refer to borrowing at a high short-term interest rate and then using the borrowed funds to invest in a high-yield bond OD. The term is sometimes used to refer to borrowing at a low short-term interest rate and then using the borrowed funds to invest at a higher long-term interest rate. Why might a carry trade end badly? OA. Because if interest rates rise more rapidly than expected, the price of the long-term investment will decrease and create a capital loss for the investor. OB. Because the average of expected short-term interest rates should be almost equal to the interest rate of the long-term investment, thus wiping out potential profits from the carry trade. OC. Because there is an increased risk of default on high-yield bonds, the price of the investment will decrease, thus eliminating any potential profits from the carry trade. OD. A and B only OE. All of the above. [Related to Solved Problem 5.2a] An anonymous billionaire investor was quoted in the Wall Street Joumal as asking: "Has there ever been a carry trade that hasn't ←ended badly? Source: Robert Frank, "Where Billionaires Are Puting Their Money" Wall Street Journal, September 15, 2010. What is a carry trade? OA The term implies an average of the expected short-term interest rates over the life of a long-term investment will be roughly equal to the interest rate on the long-term investment. OB. The term implies the gap between the rate at which an average investor can borrow and the rate at which the investor could invest in Treasury bonds or other long-term bonds is likely to be equal. OC. The term is sometimes used to refer to borrowing at a high short-term interest rate and then using the borrowed funds to invest in a high-yield bond OD. The term is sometimes used to refer to borrowing at a low short-term interest rate and then using the borrowed funds to invest at a higher long-term interest rate. Why might a carry trade end badly? OA. Because if interest rates rise more rapidly than expected, the price of the long-term investment will decrease and create a capital loss for the investor. OB. Because the average of expected short-term interest rates should be almost equal to the interest rate of the long-term investment, thus wiping out potential profits from the carry trade. OC. Because there is an increased risk of default on high-yield bonds, the price of the investment will decrease, thus eliminating any potential profits from the carry trade. OD. A and B only OE. All of the above.
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A carry trade is a financial strategy that involves borrowing at a low shortterm interest rate and investing in a higheryielding longterm investment The idea behind this strategy is that the differenc... View the full answer
Related Book For
Money, Banking, and the Financial System
ISBN: 978-0134524061
3rd edition
Authors: R. Glenn Hubbard, Anthony Patrick O'Brien
Posted Date:
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