Borrowing at a low interest rate in one currency to lend at a higher interest rate in another currency is sometimes called a “carry trade.” An article in the New York Times observes: “China has been at the forefront of this so-called carry trade, in which corporations and countries tap dollar-based lenders and then invest the proceeds in higher-yielding assets denominated in local currencies.”
a. What does the article mean by “higher-yielding assets denominated in local currencies”?
b. Would investors be certain to make a profit by following this strategy? Briefly explain.
c. Would investors engaging in this carry trade likely cause an increase or a decrease in the value of the Chinese yuan in exchange for U.S. dollars? Briefly explain.