Question

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 6 percent. John, an active currency trader, borrows in Japanese yen, converts the money into U.S. dollars and deposits it in a U.S. bank. The speculative element of John's carry trade is that its success is based upon his belief that

Multiple Choice

there will be no adverse movement in exchange rates or interest rates.

liquidity is the key factor in determining interest rates.

increasing money supply will not drive inflation.

hedging insures a company against foreign exchange risks.

spot exchange rates are more favorable than forward exchange rates.

Answer 1

There will be no adverse movement in the exchange rates or interest rates

Step-by-step explanation:

John's speculative element is that there will be no adverse movement in the exchange rates or interest rates . that is why he borrowed in Japanese Yen and converted it to U.S dollars and also deposited it into a U.S bank with the hope of earning a high interest rate on his money.

If the interest rates on bank Deposits in the U.S drops from 6% and the interest rate on borrowings in India increases above 1% with an adverse change in the exchange rate between Japanese Yen and U.S dollar John would lose alot of his money

Answer 2

• there will be no adverse movement in exchange rates or interest rates.

Step-by-step explanation:

John's best speculative element is that everything would remain in his favor; especially the exchange rates and there interest rates.

Assuming after his transaction there is a sudden negative or adverse effects on the interest rate from 6 percent to 1 percent for US deposit and a decline in the USD/Japanese Yen exchange rate he would be faced with great loses.