What Is Carry Trade? Meaning & Example
Definition
A carry trade borrows or sells a low-interest-rate currency to buy a higher-yielding one, aiming to earn the interest difference. Sudden currency moves can wipe out the interest earned.
Related terms
An interest rate is the cost of borrowing money or the reward for saving it, shown as a yearly percentage. Central bank rate decisions influence rates throughout the economy.
Exchange RateAn exchange rate is the price of one currency in terms of another. Rates change constantly based on trade, interest rates, inflation and sentiment.
LeverageLeverage means using borrowed money or derivatives to control a larger position than your own capital alone allows. It magnifies both gains and losses.
What is Carry Trade?
A carry trade borrows or sells a low-interest-rate currency to buy a higher-yielding one, aiming to earn the interest difference. Sudden currency moves can wipe out the interest earned.
Can you give an example of Carry Trade?
Selling a currency yielding 0.5% to buy one yielding 5% earns about 4.5% a year in interest difference if exchange rates stay stable.