Carry Trade

A Carry Trade is a trading strategy that involves borrowing money in a currency with a low interest rate and investing it in a currency with a higher interest rate to capture the interest rate differential. In a carry trade, traders aim to profit from the interest rate differential between two currencies while potentially benefiting from exchange rate movements.

For example, a trader may borrow money in a currency where the interest rate is low, such as the Japanese Yen (JPY), and use those funds to purchase assets denominated in a currency with a higher interest rate, such as the Australian Dollar (AUD). The trader earns the interest rate differential between the two currencies as profit.

Carry trades can be profitable when the interest rate differential remains stable or when the higher-yielding currency appreciates against the lower-yielding currency. However, carry trades also involve risks, including exchange rate fluctuations and changes in interest rate differentials, which can result in losses if not properly managed. Traders often employ risk management strategies to mitigate these risks when engaging in carry trades.