Carry Trade
A carry trade borrows in a currency with low interest rates and invests the proceeds in a currency or asset paying higher rates, keeping the difference. It earns steadily while exchange rates are calm and can lose heavily when the funding currency jumps.
Also called: currency carry trade · FX carry · yen carry trade · carry
The classic version borrows a low-yielding currency, converts it at the spot rate and buys short-term deposits or bonds in a high-yielding one. The trader earns the interest differential, the carry, for as long as the position is open. Textbook theory says the high-yield currency should depreciate by enough to cancel the gain; in practice it often fails to do so for long periods, which is why the trade persists and grows.
The risk is a sudden reversal, when many leveraged positions unwind at once. The BIS described one in August 2024. Yen-funded positions, roughly estimated at ¥40 trillion (about US$250 billion) beforehand, unwound after the yen rebounded and weak US jobs data on 2 August; on 5 August the Japanese TOPIX index fell 12 percent in a single day. Markets largely recovered within days, but losses fell on those forced to close at the worst moment.
The term is also used for borrowing short and lending long along the yield curve, the carry that banks earn through maturity transformation. For FX businesses carry shows up in forward points: the interest differential between two currencies is what makes the forward rate differ from spot.
In practice
Carry looks like income but is payment for bearing crash risk. Hedging the currency with a forward removes the gain, because the forward price already reflects the interest differential.
Example
Borrow ¥150 million at 0.5 percent, convert to US$1 million at 150 yen per dollar, and hold US bills at 4.5 percent. The net gain is about US$40,000 a year. A 4 percent rise in the yen wipes it out; a 10 percent rise turns it into a loss of about US$60,000.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Carry Trade, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Arbitrage | Arbitrage locks in a price difference with little or no risk. A carry trade takes open currency risk to earn an interest difference. |
See also
- Forward ContractA forward contract is an agreement to exchange one currency for another on a future date at a rate fixed today. It creates a binding obligation on both sides — which is what makes it useful for certainty and dangerous if the underlying payment never happens.
- Yield CurveThe yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
- ArbitrageArbitrage is buying and selling, or borrowing and lending, the same or closely equivalent things at the same time in different markets to profit from a difference in price. By exploiting such gaps, arbitrage tends to close them.
- HedgingHedging is taking a position that gains when an existing exposure loses, so that a move in a price, rate or currency leaves the combined result roughly unchanged. A hedge reduces uncertainty; it does not guarantee a profit or rule out a loss.
- Spot RateThe spot rate is the price for exchanging one currency for another for near-immediate settlement. "Immediate" is a convention rather than a fact: standard spot settlement in most currency pairs is two business days after the trade.