Optimize Currency Carry Trades

Abstract

In this article, we compare the risk-return profile of simple currency carry trades and optimized carry trades. We conclude that optimized currency carry trades offer impressive returns with significantly less volatility than other carry trades, hence achieving a higher information ratio. We also compare the ex-post currency trade performance using different volatility models and find that the implied volatility does a better job in terms of the realized information ratio and tracking error forecasting.