Question
Felipe Lemos is currency strategist with the Miami-based hedge fund Kawa. With the annual interest rate at 8.5 percent for real denominated deposits with AAA-rated
Felipe Lemos is currency strategist with the Miami-based hedge fund Kawa. With the annual interest rate at 8.5 percent for real denominated deposits with AAA-rated Brazilian banks, Felipe is considering taking $10 million from Kaw money market mutual funds currently yielding paltry annual 0.75 percent to invest in real (BRL). The current spot exchange rate between the U.S. and Brazilian currency currently stands at BRL 1.82 = $1.
a. Under what exchange rate scenario would the carry trade be profitable?
b. What are the risks involved in the carry trade? How can they be hedged?
c. To discourage speculative short-term capital inflows, the central bank of
Brazil is imposing 10 percent withholding tax on interest earnings by foreign investors. Will Felipes decision be changed?
Step by Step Solution
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Step: 1
a The carry trade would be profitable if the return from the interest rate differential the difference between the interest rates on Brazilian real de...
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
