You are an FX trader at a bank registered in Hong Kong. You have been tasked to formulate and execute a currency carry trade strategy involving the U.S. Dollar (USD) and the Armenian Dram (AMD). Suppose you observe that the spot price of USD in terms of AMD is 478.47 and the 1-year USD and AMD deposit rates are 2.6% and 9.5%, respectively.

1. Outline a carry trade strategy to exploit the interest rate differential between USD and AMD bank deposits if you believe AMD is unlikely to depreciate significantly in one year.
2. Under what condition would your strategy be profitable?
3. Suppose the Hong Kong Monetary Authority, Hong Kong's regulatory agency that monitors FX risk exposure of registered banks, learned about your position and instructed you to cover it given the recent armed conflict between Armenia and Azerbaijan (i.e., the 2020 Nagorno-Karabakh war). Explain What kind of contract you would need and how that contract would address your FX risk exposure.
4. What condition in the contract would allow you to break even (i.e., zero profit)?

Answer rating: 100% (QA)

A Outline a Carry Trade Strategy to Exploit the Interest Rate Differential 1 Deposit USD in a US ban... View the full answer