Carry trade and option volatility

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Yoko0_0

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Schweser mock 1 morning session
Answer says that we should close out FX carry trade when the volatility implied by market prices of options on equity or currency is high…can someone please explain why it is profitable to close out FX carry trade when implied volatility is high?
 
When the volatility is high, that means there is going to be a reversal of carry trade. If everyone tries to get out at once, there could be big movements in the currency and hence it is better to close out the position.
 
sunpak, thank you for your reply…possible to explain why high volatility leads to reversal of carry trade, please? My best guess is that investors are risk averse and want to close out carry trade when they are not certain how interest rate moves…is this correct?
 
sunpak overstates it, but only a bit. When the volatility of currency exchange rates is higher, there’s a greater chance that the rates will move unfavorably for the carry trade, whereupon traders will close out (reverse) their positions. It isn’t certain, but it’s more likely.
 
Thank you so much, magician! Love your financial exam help 123 :-) hope more topics will become available (even if we have to pay).
 
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