What Are Carry Trades?
A carry trade is an investment strategy that is often utilized in currency trading. Sometimes referred to as a currency carry trade, the process involves selling currency that has a low rate of interest and using the proceeds from the sale to secure a different currency that carries a higher interest rate. The idea behind carry trades is to earn a return from the difference in the rates. Carry trades make it possible to earn returns based on the difference in the interest rate between the two transactions. To execute a trade, an investor may borrow funds from a bank in one nation, then convert those funds into a different currency. The currency is then used to secure a bond issue that carries a higher rate of interest than the interest rate on the loan. Assuming that the loan can be paid off before there is any significant fluctuation in the exchange rate between the two currencies involved, the return on the carry trading can be significant.
