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The Evidence and Impact of Financial Globalization by Gerard Caprio

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Chapter 17

Carry Trade

Ò. Jordà

University of California Davis, Davis, CA, USA

Outline

Introduction

One of the most basic principles of finance states that a zero-cost investment should have zero expected return – in the alternative, there would be an arbitrage opportunity. Frictions and compensation for risk may alter the specifics but not the core of this principle: you should not get something for nothing. The carry trade is an example of a zero-cost investment where the speculator borrows in ...

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