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Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 4 percent. Carlos, an active currency trader, borrows in Indian rupees, converts the money into U.S. dollars and deposits it in a U.S. bank. What is the speculative element of this carry trade?

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Answer:

The speculative element of this carry trade is that its success is based upon the belief that there will be no adverse movement in exchange rates or interest rates.

Explanation:

A carry trade is when you borrow a currency that has a low interest rate, then use that money to buy another currency that pays a higher interest rate. You make money on the difference between the interest rates.

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