Question No. 1: Strategies for a Global Macro Hedge Fund

(a)

Currency CT Strategy

Carry Trade is among the simplest strategies that are being used in this era by the traders for currency trading. It involves the buying of a currency that has a high interest rate against the currency that has a low interest rate. Additionally, for every single day in which we hold the currency, the broker is going to pay us the interest of the difference between the two currencies that we are trading in.

In order to succeed in a carry trade strategy, the trader must exchange the currency that has a higher interest rate with the one having a lower interest rate. A carry trade strategy does not depend solely upon the timing of trade but also on the difference between the currencies, i.e. spread. An ideal trade is the one in which the trader would take a long position for the currency that is expected to expand against the currency whose interest rate is stationary. The reason behind this is because when the interest rate on a currency increases, the overall value of the currency also increases.  (Taylor, 2011)

Superior performance can be achieved in the carry trade strategy by trading in the direction where the carry interest is. As, apart from the trading gains, it also involves interest earnings.

Other than this, superior performance can be produced by pairing a currency with the one that would provide a greater interest rate and that is also likely to be appreciated in the near future. This strategy would only prove to be successful in the following two conditions.

• If we have taken a short position, then in order to succeed, it is required that the Central Bank would decrease the interest rate.
• If we have taken a long position, then it is required that the Central Bank of the country would increase the interest rate.

Alternate Investments Harvard Case Solution & Analysis.

Currency PPP Strategy

Purchasing Power Parity (PPP) is a theory that is focused on determining the required modifications that are needed in order to bring two currencies at par. In simple words, it can be explained as that, the value of a commodity must be the same in two different currencies. This theory is based on the concept of law of one price, i.e. same goods should have the same price in different markets in the absence of transaction cost. It is obvious that the consumption of goods is different in different countries, but currency PPP strategy is used in order to compare different countries on this basis and to find out which country is more expensive in terms of living. (Vogel, 2018)

PPP performs better than any other strategy. Research shows that when there is a downturn in the economy, PPP performs well in such times of crisis in comparison to other strategies.

Additionally, with respect to the PPP strategy, it can be said that if there is more difference in short term interest rates of the countries, then the strategy would be more effective.

In order to produce superior performance inn PPP strategy, the investor is required to invest an overvalued currency in an undervalued currency for a one month time. Additionally, portfolio management should be done properly...................

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