Abstract
Empirical studies have shown that carry trade plays an increasingly important role in driving exchange rate movements. In this paper, we analyse the two prominent types of carry trade strategy namely covered interest parity (CIP) and uncovered interest parity (UIP) by examining the benefits and exchange rate risks in an unexpected high volatile environment in emerging markets. The influence of sovereign and liquidity risks on carry trade is also investigated. Since carry trade can have an enormous impact on macro-economic factors, understanding basic characteristics of carry trade will be useful for both researchers and policy makers in countries susceptible to carry trade speculations.
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