Carry Trade
a.k.a. Carry
Borrowing in a low-interest currency to hold a high-interest one, aiming to earn the interest difference.
The carry trade is about getting paid to wait. You sell a currency with a low interest rate and buy one with a high rate. Each day you hold the position, you earn the gap between them, paid as positive swap.
The catch is the exchange rate. If the high-yield currency drops, it can wipe out months of interest in a day. Carry trades are popular in calm, confident markets and unwind violently in panics, when everyone rushes for the exit at once. The yen, long cheap to borrow, has been the classic funding currency.
A simple carry
- Currency A pays 5%, currency B pays 0.5%.
- You buy A against B, so you earn about 4.5% a year before broker costs.
- On a large position that interest adds up daily.
Bottom line: But if A falls 5% against B, a year's interest is gone.
Watching only the interest and ignoring that the exchange rate can move far more than the yield in a single week.
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