Carry trade and Net zero: Difference between pages

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1.  ''Speculation - foreign currency.''
''Environmental concerns - emissions''.


A carry trade is a speculative foreign exchange trading strategy.
Net zero emissions means that any greenhouse gas emissions are balanced by schemes to offset an equivalent amount of greenhouse gases from the atmosphere, such as planting trees or using technology like carbon capture and storage.
 
It involves borrowing a low interest-rate currency, and investing in a higher interest-rate currency.
 
 
The potential benefit to the trader is the interest differential between the higher interest income receivable on their investment, and the lower interest expense payable on their borrowing.
 
The downside is the loss on the likely depreciation of the higher interest-rate currency invested in.
 
The expected currency depreciation is predicted by the International Fisher Effect.
 
 
The losses on the currency depreciation can exceed the interest rate gains by many times.
 
For this reason, it is a very high-risk form of speculation.
 
 
The trader hopes that they will be able to enjoy gains on the interest rate differential and then close out the trade, before any sharp weakening of the higher interest rate currency.
 
 
Also known as a ''currency'' carry trade.
 
 
:<span style="color:#4B0082">'''Example: Emerging market currency - carry trade'''</span>
 
:A trader borrows a hard currency at an interest rate payable of 1% per annum.
 
:They invest in an emerging market currency to enjoy an interest rate receivable of 10% per annum.
 
:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open.  Usually measured in days.
 
:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency.  By an amount that can be calculated from the interest rate differential.
 
 
2.  ''Speculation - other financial assets.''
 
Similar speculative activity, where the financial asset invested in can be any asset that produces a higher rate of income than the cost of borrowing.
 
For example, ''riding the yield curve''.




== See also ==
== See also ==
* [[Arbitrage]]
* [[Adaptation Action Coalition]]
* [[Cost of carry]]
* [[Adaptation communications]]
* [[Day trading]]
* [[Business Ambition for 1.5C]]
* [[Depreciation]]
* [[Carbon credits]]
* [[Emerging currency]]
* [[Carbon-neutral]]
* [[Exotic currencies]]
* [[Climate-related disclosure]]
* [[Expectations theory]]
* [[COP26]]
* [[Financial asset]]
* [[Credit rating]]
* [[Fisher Effect]]
* [[Emissions]]
* [[Foreign currency]]
* [[Environmental concerns]]
* [[Futures]]
* [[ESG investment]]
* [[FX instrument]]
* [[Glasgow Financial Alliance for Net Zero]] (GFANZ)
* [[Hard currency]]
* [[Gold standard]]
* [[Hedging]]
* [[Green bond]]
* [[Interest rate parity]]
* [[Green Bond Principles]]
* [[International Fisher Effect]]
* [[Greenhouse gas]]
* [[No arbitrage conditions]]
* [[Hybrid]]
* [[Purchasing power parity]]
* [[Nationally determined contribution]]
* [[Riding the yield curve]]
* [[Net-Zero Asset Managers Initiative]]
* [[Risk management]]
* [[Net-Zero Asset Owner Alliance]]
* [[Speculation]]
* [[Net-Zero Banking Alliance]]
* [[Straddle]]
* [[Paris Agreement]]
* [[Resilience]]
* [[Road to Zero]]
* [[United Nations Framework Convention on Climate Change]]
* [[Zero emissions]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:The_business_context]]
[[Category:Compliance_and_audit]]
[[Category:Ethics]]
[[Category:Identify_and_assess_risks]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Manage_risks]]
[[Category:Cash_management]]
[[Category:Risk_frameworks]]
[[Category:Financial_products_and_markets]]
[[Category:Risk_reporting]]
[[Category:Liquidity_management]]

Revision as of 22:40, 14 October 2021

Environmental concerns - emissions.

Net zero emissions means that any greenhouse gas emissions are balanced by schemes to offset an equivalent amount of greenhouse gases from the atmosphere, such as planting trees or using technology like carbon capture and storage.


See also

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