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Question - An asset manager decided to implement a 6-month carry trade strategy between currency A and B. The 6-month interest rates of currencies A and B were 8% and 3% respectively at the initial moment of the strategy implementation. At that time, the exchange rate between currency A and B was 3: each unit of currency A buys 3 units of currency B. The amount invested by the asset manager in this carry trade strategy was 500.000 in terms of currency A.
a) What do you expect to be the design of the carry trade strategy that this asset manager has implemented? Discuss.
b) At the end of the 6-month period, the exchange rate between currency A and B was 2.2. What is the final result of this carry trade strategy for the asset manager? Discuss.
c) During the 6 months of the carry trade strategy, the asset manager is exposed to a specific source of market risk. Which is that market risk and what could be a strategy to hedge that risk? Discuss.
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