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Case background:
The global financial crisis of 2007-2009 has left a marketplace in which the U.S. Federal Reserve and the European Central Bank have pursued easy money policies. Both central banks, in an effort to maintain high levels of liquidity and support fragile commercial banking systems, have kept interest rates at near-zero levels. Now global investors, those who see opportunities for profit in an anemic global economy, are using those same low-cost funds in the U.S. and Europe to fund uncovered interest arbitrage activities. But what is making this emerging market carry trade so unique is not the interest rates, but the fact that investors are shorting two of the worlds core currencies, the dollar and the euro.
Global investors are finding it profitable to borrow in the US or Europe in dollars or euros -- and invest those funds in higher yielding interest currencies like the Indian rupee
2.
What makes this emerging market carry trade so different from traditional forms of uncovered interest arbitrage?
This carry trade appears to benefit the investor/speculator on higher yielding interest and emerging market currencies appreciation, a combined effect. This can be due to the fact that the US economics and Euro countries suffer relatively slow economic growth due to the economic crisis starting from 2008, while the major emerging market countries have economies which are showing economic growth and the benefits of renewed foreign direct investment.
3.