Currency Carry Trade Portfolios and their Sensitivity to Interest Rates

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Reichenecker, J. A. (2014). Currency Carry Trade Portfolios and their Sensitivity to Interest Rates.

Publication type

Working Paper


This paper provides an empirical investigation of naive and optimized carry trades for G10 and emerging market currencies. Additionally, the role of the interest rate delta between funding and investment currency is discussed.Naive carry trades select funding and investment currency by the level of the implied interest rate. Optimized carry trades consider the FX dynamic as a second selection criteria aiming to enhance the risk-return profile. Optimized carry trades are less correlated to the U.S. equity market and are more profitable during the recent financial crises, than naive carry trades. The paper concludes, that optimized carry trades are a useful strategy under financial stress.The impact of the interest rate delta is discussed by sensitivities. Contrarily to naive carry trades, sensitivities of optimized carry trades follow a determined shape, such that the impact of each interest rate on the risk-return profile is exante known. This helps to understand, which interest rate is mainly siphoned off by the carry trade, such that the unknown, future FX spot rate has an essential influence on the carry trade.


Enhanced Carry Trades - A new Approach in Asset Management and Trading
PhD-Thesis, February 2014 until February 2018 (finished)

Standard carry trades sell low-yield currencies and buy high-yield currencies. The trading idea is to capture the interest rate differential between currencies. The unique selection criterion of ... more ...


Organizational Units

  • Institute for Financial Services
  • Chair in Business Administration, Banking and Financial Management