Abstract

In a currency carry trade, an investor borrows money in a low interest rate currency and invests in a high interest rate currency. The trade is profitable if the future exchange rate does not adjust to the interest rate differential. After downloading exchange rate data, a Monte Carlo simulation of a carry trade is performed in Excel based on a normal distribution and the data’s mean and standard deviation. A bootstrapping carry trade simulation exercise is also generated by randomly selecting observations from the historical data. In contrast to the Monte Carlo simulation, the bootstrapping exercise preserves the skewness within the historical data. A carry trade simulation can generate student interest and strengthen student understanding of Excel modeling, Investments, International Finance, and Statistics. The assignment can also be used to illustrate uncovered interest rate parity and forward rate bias.

Document Type

Article

Publication Date

2022

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Copyright © 2022 The Authors.

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FX-SIMULATION-PAPER.xlsx (191 kB)

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