Abstract

Carry trade is an investment strategy in which investors borrow low-yield currency and invest it in a high-yield currency, hoping to profit from the interest-rate differential. Based on uncovered interest parity (UIP), carry trade should not work, but studies have shown that UIP does not hold. This failure has led to unprecedented returns for that strategy, outperforming the S&P 500 in terms of the Sharpe ratio. This paper examines the profitability in using pegged currency in such a strategy. While carry trade is performed largely with currencies that adapt floating exchange rate system, conducting such a strategy using pegged currency has proven to be very rewarding, especially when the strategy is enhanced with forecasting methods.

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