Carry Trade

Borrowing or selling a low-interest currency to hold a higher-interest one, aiming to earn the rate difference.

Example

Holding a currency yielding 5% against one yielding 1% earns about 4% a year if exchange rates stay put.

Important

Rate differences are earned slowly and currency reversals happen fast, often during market stress.

Related terms

  • Rollover Interest (Swap) — Interest credited or charged on a leveraged currency position held overnight, based on the two currencies' interest rates minus a broker markup.
  • Interest Rate Parity — The relationship that sets forward exchange rates so that differences in interest rates between two currencies are offset.

Lessons that explain it

  • Price moves, interest differences and leverage - in a market where one side's gain is the other's loss — Forex returns come from exchange-rate moves and interest-rate differences, magnified by leverage, in a market that is roughly zero-sum before costs and negative-sum after them. (12 min)

All 578 terms in the Investing glossary