Description

As from issue number 50, the Series of Economic Studies of the Central Bank of Chile will be called Studies in Economic Statistics.

Wide interest rate differentials between economies may generate attractive investment opportunities. However, these operations could cause major disruptions in foreign exchange markets, such as excessive volatility in the exchange rate due to overexposure to speculative flows. The investment strategy by which an agent takes advantage of interest rate differentials of two economies is known as carry trade. This strategy assumes the absence of uncovered parity. This document describes this investment strategy as well as a measure called carry-to-risk ratio that allows identifying opportunities in which this strategy is more attractive to investors. Finally, evidence is presented for the Chilean case, its implications for the formal exchange market (FEM) and the eventual impact in the movement of the Chilean peso.