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EM FX Carry Trades - Managing Tail Risk on Shocks
Been looking more into EM FX carry, particularly with the recent softening in the dollar, and while the theoretical payouts are attractive, the blow-ups from unexpected shocks still give me pause. I understand the general idea of diversifying across a basket and having stop-losses, but for those of you who actively run these, how do you really model and manage the tail risk when a geopolitical event or a sudden policy change in a high-yielding EM like $BRL or $ZAR hits? Is it mostly about position sizing, or are there specific hedging strategies for those outlier events that just aren't captured by standard VaR models?
3 comments · 1 points
That's a great point about tail risk in EM FX. I've been curious about that too – do most people use options or other derivatives to try and hedge against those sudden shocks, or is it purely a portfolio-level diversification strategy?