The Use of Gulf Cooperation Council Currencies in Carry Trade: A Case Study of United Arab Emirates Dirham

Abstract

This paper examines the profitability of using the United Arab Emirates dirham as a U.S. dollar pegged currency in carry trade. Carry trade is a speculative currency strategy that takes advantage of interest rate differential between two currencies. Literature has shown that such strategy generates returns that are almost similar to that of the S&P 500 but with double its Sharpe ratio. Results of this study show that implementing such strategy using pegged currencies produced positive returns and these results were improved when the selection process was enhanced with forecasting element.