FX Carry Trade Strategy
Long high-yield currencies, short low-yield currencies — harvest the forward premium that uncovered interest parity says should not persist.
Definition
Rank G10 or a broader set on short-rate differentials (or forward premium). Long the top, short the bottom, often dollar-neutral. Hold a month. The left tail is a risk-off unwind when everyone exits the same high-yielders.
Why it matters
Carry is the default FX factor and a crash-prone one. Funding-liquidity and equity beta hide inside the coupon.
Case
2008 and 2015 CHF: high-yield longs gap down, lows rally, the carry book prints a year of coupon in a week the other way.
How to read it
Universe, hedge to USD or not, and a crash overlay (vol or trend). Do not annualize the coupon as if UIP never snaps.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Carry Trades and Currency CrashesBrunnermeier, Nagel, Pedersen · 2008 · NBERCarry as crash-risk premium.