Importance of Risk Aversion: 2 ? Day Trading the Currency Market ...

June 1st | Day Trading the Currency Market

Carry trades will generally profitable when investors have low risk aversion and unprofitable when investors have high risk aversion. Therefore, before taking a carry trade are critically aware of the risk environment ? or investors as a whole have high or low risk aversion ? and when it changes. Increasing risk aversion is generally beneficial for lowinterest rate-paying currency: sometimes the mood of investors will change quickly ? investors willingness in risky transfers can change dramatically from one moment to the next. These large shifts are often caused by major global events. Risk aversion of investors is rising quickly, the result is generally a large capital inflows into lowinterest rate-pay ?safe haven? currencies. For example, in the summer of 1998 the Japanese yen appreciated against the dollar by more than 20% in the span of two months, due mainly to the Russian debt crisis and Long Term Capital Management hedge fund bailout. In the same way, only change the September 11, 2001, terrorist attacks the Swiss franc rose by more than 7 percent against the dollar over a period of 10 days. This sharp movements in currency values occur often as risk aversion quickly changes from low to high. As a result, if risk aversion in this way shifts, a carry trade can be just as profitable to quickly turn of unprofitable. Conversely, if investor risk aversion from the highest to the lowest, trade is more profitable, as described in Figure 9.8 wear. 103 how do you know if investors as a whole high or low risk aversion have? Unfortunately, it is difficult to measure investor risk aversion with a single number. A way to get a global idea of aversion to risk level is to look at the various proceeds bonds pay. The wider the difference, or ? ***** ***** ***** ***** ***** ***** ***** **

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Tags: 2, Aversion:, Importance, risk

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