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Quantitative Finance · Glossary

What is Crash-hedged carry?

Definition 14.2 Strategies II: Volatility, Relative Value, Macro and the Bank Desks · Chapter 14 — Cross-Currency Basis and FX Carry

Crash-hedged carry is a carry position combined with out-of-the-money options that pay when the high-yielding currencies fall sharply against the funding currencies, so that the position’s return no longer carries the crash; the options’ cost measures the price of the crash risk the unhedged trade bears.

The synthetic currency carry basket over thirty years with three planted crashes, unhedged and with a monthly put struck 1.5 standard deviations down. Data: s2_fxcarry.cumulative.
Figure 14.2. The synthetic currency carry basket over thirty years with three planted crashes, unhedged and with a monthly put struck 1.5 standard deviations down. Data: s2_fxcarry.cumulative.
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