Arbitrageurs could buy the high-interest currency today, lock in a future sale at the same price and pocket the extra interest from holding the currency until the forward contract is settled.In practice, the forward market is a poor forecaster.
That is why high-interest currencies trade at a discount to their current or "spot" rate in forward markets.
But as investors borrowed in low-interest currencies, such as the yen, to invest in high-yielding ones, this made the latter currencies stronger.
That made Iceland a prime target for the "carry trade": borrowing in low-interest currencies to invest in higher-yielding ones.
Russian rates remain too low to attract inflows from carry trades, where investors borrow in low-interest currencies and seek a yield advantage by investing in currencies offering a higher return, economists say.
The FX world had seen a number of fairly self-evident one-way bets against high-interest currencies: the Argentinean peso, for instance; some rival firms' FX departments had, he knew, made out like bandits.
He spent the ensuing decades investing in some of the repercussions: privatized companies, the transformation of China, the acceleration of leveraged consumption in the United States, mining interests, currencies, consumer goods.
The country's banking system had grown rapidly through easy access to cheap foreign funding, while the currency became sharply overvalued as high domestic interest rates made the Icelandic krona popular in the so-called carry-trade (borrowing in low-interest currencies to invest in high-yielding markets).
One longstanding approach to investing in currencies is known as a "carry trade": when an investor borrows money in a low interest rate currency and invests in a high interest rate currency, while trying to catch the difference between the rates as a profit.
Profits can also be made if the high interest rate currency strengthens relative to the low interest rate currency.
