Global Macro investing strategy - Exercise 2 (Homework) · The short-term interes

Question

Global Macro investing strategy - Exercise 2 (Homework) · The short-term interest rate in Germany is 2% and 10% in China. The exchange rate between the Renminbi (RMB) and the Euro () is 0.12 in to. Against this background, you have invested 10,000,000 by using a carry trade strategy and there are no taxes and transaction costs. Since the short-term interest rate in China is higher than in Germany (10% > 290) you have borrowed short-term in Euro and you have invested the proceeds in Renminbi in to. In t, the exchange rate between the Renminbi and the Euro is 0.08. Calculate the return from your carry trade strategy! Explain your result!

Explanation / Answer

interest to be paid = 10,000,000*2% = 200,000 Euros

Amount invested in RMB = 10,000,000/0.12

value after 1 year = 10,000,000/0.12 * 1.10

value in Euros = 10,000,000/0.12 * 1.10*0.08 = 7,333,333.33

after paying the interest value = 7,333,333.33 - 200,000 = 7,133,333.33

return = 7,133,333.33/10,000,000 - 1 = -28.67%

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