What's a carry trade?

<p id="isPasted">FX carry trade, also known as currency, carry trade, is a financial strategy whereby the currency with the higher interest rate is used to fund trade with a low-yielding currency. Using the FX carry trade strategy, a trader aims to capture the benefits of risk-free profit-making by using the difference in currency rates to make easy profits.</p><p>For example, if the pound (GBP) has a 5% interest rate and the U.S. dollar (USD) has a 2% interest rate, and you buy or go long on the GBP/USD, you are making a carry trade. For every day that you have that trade on the market, the broker will pay you the difference between the interest rates of those two currencies, which would be 3%.&nbsp;</p><p>&nbsp;</p><p>A trader involved in an FX carry trade aims to make a profit off the difference in the interest rates of the currencies of two countries, as long as the exchange rates do not fluctuate significantly. The funding currency is the currency that is being traded-in or being exchanged in a currency carry trade transaction. It typically comes with a lower interest rate.</p><p>Investors execute an FX carry trade by borrowing the funding currency and taking short positions in the asset currencies. The central banks of the funding currencies usually use monetary policies to lower interest rates in order to facilitate growth during times of recession. As the rates fall, investors borrow money and invest them by taking short positions.</p>

<p>A carry trade involves borrowing or selling a financial instrument with a low interest rate, then using it to purchase a financial instrument with a higher interest rate. While you are paying the low interest rate on the financial instrument you borrowed/sold, you are collecting higher interest on the financial instrument you purchased. So your profit is the money you collect from the interest rate differential.</p>

<p>The basis for all carry trades, spectaculars --- Speculators watch for difference in short term interest rates in economies and they move currency from one where it is low to the other where the rates are high. This raises the value of the currency where the interest rates have gone up. They keep it for short term there and repatriate when the maturity of the short term debt obligation is completed. So they get to gain the returns which is a function of rising currency value plus rising interest rates less the loss in value when the currency is repatriated back.</p>

<p>A currency carry trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.</p>

<p>Carry trades involve borrowing at a low-interest rate and investing in an asset that provides a higher return. In a carry trade, the borrowed amount is converted into another currency after borrowing in a low-interest rate currency. Generally, the proceeds of the sale would be deposited in the second currency if it offered a higher interest rate. Stocks, commodities, bonds, and real estate that are denominated in the second currency could also be purchased with the proceeds.</p>