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. A carry trade is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency.

What is an example of a currency carry trade?

As an example of a currency carry trade, assume that a trader notices that rates in Japan are 0.5 percent, while they are 4 percent in the United States. This means the trader expects to profit 3.5 percent, which is the difference between the two rates. The first step is to borrow yen and convert them into dollars.

What is a negative carry trade?

A negative carry trade involves borrowing a currency with a high-interest rate while buying a currency with a low-interest rate. The trader will incur a loss on the interest rate differential and have to pay interest for holding the position.

What is a yen carry trade?

Emerging market economies are increasingly reliant on this foreign debt. One of the most popular carry trades is the Yen carry trade—this is because the JPY has extremely low interest rates on loans. Large traders will borrow Yen at these very low interest rates, and then convert them to dollars.