The index, called IncomeEM, is intended to deal with the higher volatility of emerging-market currencies. It keeps track of interest rates, along with volatility implied by forward rates, on a basket of 20 emerging-market currencies against the US dollar. Using this data, it is rebalanced monthly to invest in the five currencies with the highest carry-to-risk ratios.
In addition, the strategy has a target volatility of 10%. It matches this by ratcheting leverage up or down depending on the historical volatility of the five currencies selected. “Once we’ve selected the currencies we want to invest in, we apply leverage or de-leverage, according to what the observed volatility of that basket has been in the past,” explained Owens. Leverage is restricted to a maximum of 300%, he added.
JP Morgan, which will publish the IncomeEM index on Bloomberg The new index is the latest in a growing number of investment products that attempt to exploit increased investor interest in the carry trade.
The new index is the latest in a growing number of investment products that attempt to exploit increased investor interest in the carry trade.
The week on Risk.net, December 2–8, 2016Receive this by email