Carry Trade Strategy MCQs
1. What is a carry trade in Forex?
A) A strategy where traders buy high-yielding currencies and sell low-yielding currencies
B) A method for predicting future market trends
C) Trading currencies based on news events
D) Short-term trading for quick profits
Answer: A) A strategy where traders buy high-yielding currencies and sell low-yielding currencies
2. What is the primary goal of the carry trade strategy?
A) To profit from short-term price fluctuations
B) To earn interest rate differentials between two currencies
C) To speculate on the stock market
D) To minimize risk in the Forex market
Answer: B) To earn interest rate differentials between two currencies
3. Which type of currency pair is typically involved in a carry trade?
A) Currencies with similar interest rates
B) High-yielding currency vs. low-yielding currency
C) Exotic currency pairs only
D) Major currencies with the same yield
Answer: B) High-yielding currency vs. low-yielding currency
4. In a carry trade, what does the trader expect regarding the currency pair’s value?
A) The higher-yielding currency will appreciate or remain stable
B) The lower-yielding currency will appreciate significantly
C) The currency pair will fluctuate rapidly
D) Both currencies will lose value
Answer: A) The higher-yielding currency will appreciate or remain stable
5. Which risk is associated with the carry trade strategy?
A) Interest rate fluctuations
B) Commodity price changes
C) Stock market crashes
D) Fixed exchange rates
Answer: A) Interest rate fluctuations
6. What happens to the carry trade when the low-yielding currency appreciates unexpectedly?
A) The carry trade becomes more profitable
B) The carry trade faces losses
C) The interest rate differential increases
D) There is no impact on the trade
Answer: B) The carry trade faces losses
7. Which currencies are commonly used in carry trade strategies?
A) US Dollar and Euro
B) Japanese Yen and Australian Dollar
C) British Pound and Swiss Franc
D) All exotic currencies
Answer: B) Japanese Yen and Australian Dollar
8. What is the “interest rate differential” in a carry trade?
A) The difference in value between two currencies
B) The difference in interest rates between two countries
C) The change in exchange rates over time
D) The gap in inflation rates
Answer: B) The difference in interest rates between two countries
9. Why might a carry trade strategy fail during times of economic instability?
A) Interest rates remain stable
B) Traders flee to safe-haven currencies, reversing the carry trade
C) High-yielding currencies become more attractive
D) The Forex market remains unaffected
Answer: B) Traders flee to safe-haven currencies, reversing the carry trade
10. What is the impact of leverage on a carry trade?
A) It reduces the risk involved in the trade
B) It magnifies both potential profits and losses
C) It eliminates the need for interest rate differentials
D) It decreases the cost of the trade
Answer: B) It magnifies both potential profits and losses
11. Which of the following is an ideal condition for executing a carry trade strategy?
A) Low volatility in the Forex market
B) High volatility in the stock market
C) Increasing inflation rates globally
D) Constant changes in central bank policies
Answer: A) Low volatility in the Forex market
12. What role do central banks play in the success of a carry trade?
A) They control stock market prices
B) They set interest rates, which impact the interest rate differential
C) They regulate Forex trading platforms
D) They prevent currency depreciation
Answer: B) They set interest rates, which impact the interest rate differential
13. In a carry trade, what is a common outcome if the high-yielding currency’s central bank cuts interest rates?
A) The carry trade becomes more profitable
B) The interest rate differential decreases, making the carry trade less attractive
C) The low-yielding currency appreciates
D) The stock market is unaffected
Answer: B) The interest rate differential decreases, making the carry trade less attractive
14. How can a trader hedge against the risks associated with a carry trade?
A) By reducing the trade size
B) By using currency options or stop-loss orders
C) By trading during high-volatility periods
D) By avoiding low-interest rate currencies
Answer: B) By using currency options or stop-loss orders
15. What is the “cost of carry” in Forex trading?
A) The profit made from holding a currency overnight
B) The interest paid to hold a position overnight
C) The difference between the buy and sell price of a currency
D) The commission charged by brokers
Answer: B) The interest paid to hold a position overnight
16. What is the effect of high inflation on a carry trade strategy?
A) It increases the attractiveness of low-yielding currencies
B) It increases the profitability of the carry trade
C) It decreases the value of high-yielding currencies, adding risk
D) It has no impact on the strategy
Answer: C) It decreases the value of high-yielding currencies, adding risk
17. What does “unwinding of carry trades” refer to?
A) The process of opening more carry trades
B) Closing out carry trades due to market risks or interest rate changes
C) Increasing leverage on carry trades
D) Holding a carry trade indefinitely
Answer: B) Closing out carry trades due to market risks or interest rate changes
18. Which global event is most likely to lead to the unwinding of carry trades?
A) A significant stock market rally
B) Central bank interest rate cuts
C) Economic recessions or crises
D) An increase in high-yielding currency interest rates
Answer: C) Economic recessions or crises
19. Why do traders typically avoid currencies from countries with unstable political systems in carry trades?
A) Political instability can lead to unexpected currency depreciation
B) Political instability increases the interest rate differential
C) Political systems have no effect on carry trades
D) It always leads to higher returns
Answer: A) Political instability can lead to unexpected currency depreciation
20. How does volatility affect a carry trade strategy?
A) It reduces the risk of currency fluctuation
B) It increases the risk of currency fluctuation, potentially harming the trade
C) It ensures consistent profits
D) It has no impact on carry trade
Answer: B) It increases the risk of currency fluctuation, potentially harming the trade