Suppose there are two monthly rebalancing currency strategies available to U.S. investors:

A. Carry trade strategy: at each month-end the investor borrows for one month at the low

yielding currency and invests this amount for one month at the high-yielding currency based

on uncovered interest parity (UIP).

B. Purchasing Power Parity (PPP) strategy: at each month-end, calculate the difference

between the realised spot exchange rate and its PPP implied fundamental equilibrium level.

The investor then borrows for one month in the overvalued currency and invests this amount for one month in the undervalued currency.

If an investor wishes to invest in currency strategies for 10 years, which currency strategy

would you recommend to him? Explain the rationale behind your recommendation.