| Summary: | 碩士 === 國立臺北大學 === 國際財務金融碩士在職專班 === 95 === Our goal in this thesis is to discuss the possibility of excess returns of currency carry trade, which exploits the ‘forward premium puzzle’. This ‘forward premium puzzle’ represents that the forward exchange rate deviates egregiously from Uncovered Interest Rate Parity (UIRP). The currency carry trade strategy involves borrowing a given amount in a low-interest-rate currency (the “funding” currency), converting the funds into a high-interest-rate currency (the “target” currency) and lending the resulting amount in the target currency at the higher interest rate. An alternative strategy of currency carry trade consists of selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We are using Japanese yen and New Taiwan dollar as the funding currency, and there are six target currencies: AUD, CAD, EUR, GBP, NZD, and USD in this thesis. We compare the strategies and the payoffs to the carry trade and apply the Modern Portfolio Theory (MPT) to construct the multi-currency portfolios that maximize the Sharpe ratio. Our main empirical findings are as follows:
1.According to the results of hypothesis test, we find that β is generally different from 1, and most of the estimates of β are negative. A negative estimate of β implies that a currency actually tends to depreciate when it is at a forward premium. Equivalently, a low interest rate currency tends to depreciate.
2.A multi-currency portfolio with a maximized Sharpe ratio which is solved by quadratic programming (QP) considers not only the interest rate differential but the correlation of the rates of change in the exchange rates. The multi-currency portfolio with maximized Sharpe ratio might not have the highest payoff, but it is the best point of balance between risk and return compared with the single currency portfolio.
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