Carried Away
Research Paper
June 1, 2007
Preview
We first discuss stress testing for not simply a position, but a strategy implementing the yen carry trade, and then examine the extent to which the market appears dependent on this trade. Though it has subsided recently, the yen carry trade has garnered a significant amount of attention, including from the popular press, since the beginning of the year. With no real increases in volatility, and yet prevailing worries about a potentially disastrous yen appreciation scenario, this is an ideal opportunity to discuss stress testing. One question is how a risk manager might examine his exposure, not just to a set of positions, but to a strategy. The other is to ask more broadly how large the market's exposure to this strategy is, and whether that suggests an increased likelihood for the Great Unwind Scenario.
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