Carry Trade

A carry trade is a strategy where an investor borrows money in a currency with a low interest rate and uses the proceeds to purchase assets denominated in a currency offering a higher yield. The profit comes from the interest‑rate differential, adjusted for any change in the exchange rate between the two currencies. Although conceptually simple, the strategy requires careful monitoring of funding costs, swap rates, and market sentiment.

How It Works

First, the trader selects a funding currency, typically one with near‑zero policy rates such as the Japanese yen or Swiss franc.

Next, the borrowed funds are converted into the target currency, for example the Australian dollar, New Zealand dollar, or an emerging‑market currency.

The proceeds are then invested in high‑yieldyield