Because interest returns are known ex ante, the only unknown factor in the carry trade (international investments) is:
A) government tax policy.
B) default risk.
C) exchange rate risk (forecast error).
D) climate change risk.

Question

Quizplus · Accepted Answer

The only unknown factor in the carry trade is exchange rate risk since interest returns are known ex ante and government tax policy and default risk can be easily evaluated. However, exchange rates can be unpredictable and subject to forecast error, which makes them the only unknown factor in the carry trade. Climate change risk is not relevant to the carry trade.

Because Interest Returns Are Known Ex Ante, the Only Unknown