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Exploiting Uncovered Interest Rate Parity Failure Using Russian Ruble

Author

Listed:
  • Musaed S. AlAli

    (Assistant Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait)

  • Mansour M. AlShamali

    (Associate Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait)

  • Tariq M. Bin-Ghaith

    (Instructor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait)

  • Ahmad Y. Bash

    (Associate Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait)

  • Abdullah M. AlAwadhi

    (Associate Professor, College of Business Studies, Department of Insurance and Banking, The Public Authority for Applied Education and Training (PAAET), Kuwait)

Abstract

The uncovered interest rate parity (UIP) is a parity condition stating that the interest rate differential between two currencies should equal to the expected change in exchange rate between them. But, it has been well documented though that such condition does not stand resulting in an opportunity to benefit from its failure. Traders take advantage of UIP failure by conducting a well-known strategy called carry trade where they borrow low interest rate currencies and invest in high interest rate currencies taking advantage of the interest rate differential and hoping that the movement in exchange rate would not offset it. With interest rate differential being the main components in conducting such strategy for carry traders, Russian ruble offers a very attractive opportunity for such investors. This paper examines the profitability of exploring the failure of UIP using carry trade by borrowing low interest rate currencies which are the U.S. dollar and the Japanese yen and investing in Russian ruble.

Suggested Citation

  • Musaed S. AlAli & Mansour M. AlShamali & Tariq M. Bin-Ghaith & Ahmad Y. Bash & Abdullah M. AlAwadhi, 2017. "Exploiting Uncovered Interest Rate Parity Failure Using Russian Ruble," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(10), pages 197-201, 10-2017.
    • Handle: RePEc:arp:ijefrr:2017:p:197-201
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    References listed on IDEAS

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    1. Musaed S. AlAli & Zaina Z. ElDukair, 2017. "The Profitability of Using Chinese Yuan in Carry Trade," International Journal of Economics and Financial Modelling, Pacharapa Naka, vol. 2(1), pages 1-6.
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