You work as a portfolio manager at a hedge fund that focuses on currency-related investment strategies. A client asks you to construct a new carry trade portfolio using currencies from among any of the developed countries. You typically execute this trade by investing and/or borrowing in offshore bank deposits with maturities of three months. Your firm's guidelines require such portfolios to have at least five long positions and three short positions. One of the currencies you are considering for inclusion in this portfolio is the Norwegian krone.

a) Should you include the NOK in your portfolio? Why or why not? If you do include it, should it be a long position or a short position? Briefly justify your answer. 

b) Your research team provides you with currency forecasts to help you understand the risks inherent in your long and short positions. Identify one macroeconomic factor and one financial market indicator you would recommend they analyze in order to help you better understand the risks of your carry trade positions. Briefly explain why you selected each of these metrics [note: your answer to this part b) may be generic; you do not need to do further research on Norway or the NOK].

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a I would include the NOK as a long position in the carry trade portfolio Norway has high interest r... View the full answer