Exploiting Uncovered Interest Rate Parity Failure Using Russian Ruble

Musaed S. AlAli, Mansour M. AlShamali, Tariq M. Bin-Ghaith, Ahmad Y. Bash and Abdullah M. AlAwadhi
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Musaed S. AlAli: Assistant Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait
Mansour M. AlShamali: Associate Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait
Tariq M. Bin-Ghaith: Instructor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait
Ahmad Y. Bash: Associate Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait
Abdullah M. AlAwadhi: Associate Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait

International Journal of Economics and Financial Research, 2017, vol. 3, issue 10, 197-201

Abstract: The uncovered interest rate parity (UIP) is a parity condition stating that the interest rate differential between two currencies should equal to the expected change in exchange rate between them. But, it has been well documented though that such condition does not stand resulting in an opportunity to benefit from its failure. Traders take advantage of UIP failure by conducting a well-known strategy called carry trade where they borrow low interest rate currencies and invest in high interest rate currencies taking advantage of the interest rate differential and hoping that the movement in exchange rate would not offset it. With interest rate differential being the main components in conducting such strategy for carry traders, Russian ruble offers a very attractive opportunity for such investors. This paper examines the profitability of exploring the failure of UIP using carry trade by borrowing low interest rate currencies which are the U.S. dollar and the Japanese yen and investing in Russian ruble.

Keywords: Carry trade; Uncovered interest rate parity (UIP); Sharpe ratio; Sortino Ratio; Russian Ruble (RUB). (search for similar items in EconPapers)
Date: 2017
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