ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Carry trade implies borrowing in low-yielding currencies and investing in high-yielding currencies where the interest rate is higher, thereby earning quick profits. Ideally, economic theory suggests opportunities from price differences of the same instrument should quickly disappear.

Detailed explanation-2: -Lower interest rates will reduce speculative demand for assets and therefore reduce demand for a currency. When interest rates are low, foreign investors will be put off from investing – which will ultimately weaken a country’s currency value. If interest rates are high, then it is likely that the opposite will happen.

Detailed explanation-3: -The carry trade involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high .

Detailed explanation-4: -The lower yielding currency is referred to as the “funding currency” while the currency with the higher yield is referred to as the “target currency”. Rollover. “Rollover” is the process whereby brokers extend the settlement date of open forex positions held past the daily cut-off time.

Detailed explanation-5: -An exchange rate is a rate at which one currency will be exchanged for another currency. Most exchange rates are defined as floating and will rise or fall based on the supply and demand in the market. Some exchange rates are pegged or fixed to the value of a specific country’s currency.