An Examination of G10 Carry Trade and Covered Interest Arbitrage Before, During, and After Financial Crises

Charles Armah Danso () and James Refalo
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Charles Armah Danso: Department of Finance, Law & Real Estate, College of Business and Economics, California State University, Los Angeles, 5151 State University Drive, Los Angeles, CA 90032, USA
James Refalo: Department of Finance, Law & Real Estate, College of Business and Economics, California State University, Los Angeles, 5151 State University Drive, Los Angeles, CA 90032, USA

JRFM, 2025, vol. 18, issue 4, 1-15

Abstract: This paper examines and compares the trading strategies of carry and covered interest arbitrage. This study constructs portfolios for G10 countries based on interest rates’ spot and forward exchange rates. We extend the prior literature by focusing on the profitability of the strategies during and around the two crisis periods, comparing both carry trade (CT), i.e., unhedged, and covered interest arbitrage (CIAT), i.e., hedged. We find that both CT and CIAT have variable profits during the period examined, with both strategies’ profits generally concentrated in the pre-crisis period and most losses in the post-crisis period.

Keywords: carry trade; covered interest arbitrage; interest rate; exchange rate; forward premium anomaly; regime modeling (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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