This paper investigates the risk exposures of currency carry trades through the lens of multivariate tail dependence. Carry trades involve borrowing in low-interest-rate currencies and investing in high-interest-rate currencies, which contradicts the uncovered interest rate parity (UIP) condition that predicts exchange rate movements should eliminate such profit opportunities. The research focuses on how tail dependence between funding and investment currency baskets affects the risk-return profile of these strategies.

The study employs multivariate tail dependence analysis to examine how extreme co-movements in currency pairs impact carry trade portfolios. By modeling risk exposures in both upside and downside scenarios, the paper identifies specific market conditions where tail dependence enhances portfolio returns and other conditions where it diminishes them. This provides a nuanced understanding of the persistent profitability of carry trades despite UIP violations, offering insights into the risk mechanisms that allow these strategies to generate returns while exposing investors to specific tail risks.