A carry trade is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return. The profit is derived from the difference between the interest rates of the two assets, which is known as the carry. Carry trades are often used in foreign currency trading, where investors borrow in a low-interest rate currency and invest in a currency that offers a higher interest rate.
FAQs
What is a carry trade?
A carry trade is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return. The profit is derived from the difference between the interest rates of the two assets, which is known as the carry.
What are some common carry trades?
Common carry trades involve trading currency pairs with high interest-rate spreads, such as the Australian dollar/Japanese yen or the New Zealand dollar/Japanese yen.
How do carry trades work?
In a carry trade, an investor borrows in a low-interest rate currency and invests in a currency that offers a higher interest rate. The profit is the difference between the interest rates of the two currencies, minus any transaction costs.
What are the risks of carry trades?
Carry trades can be risky because they often involve high leverage and can become overcrowded. Losses can be significant if the exchange rate devalues or if there is a sudden shift in monetary policy.
What are some examples of carry trades?
Examples of carry trades include borrowing in Japanese yen to invest in Australian or New Zealand dollars, or borrowing in Swiss francs to invest in euros.
How much money can you make from carry trade?
The amount of money that can be made from a carry trade depends on the size of the interest rate differential, the amount of leverage used, and the holding period.
Are carry trades a good investment?
Carry trades can be a profitable investment, but they are also risky. Investors should carefully consider the risks involved before entering into a carry trade.