Carry trade examples
Central banks make decisions about interest rates based on many factors including the health of their domestic economy, inflation, unemployment, trade exports, and more. There is a particular trade that involves the analysis of interest rate conditions of one country vs another as a primary decision point in evaluating a potential trade. This type of trade that we are going to discuss here is called the currency carry trade. In a currency carry trade, the intermediate and long term trader is looking to profit from the interest rate differential paid between the currency pairs. Download the short printable PDF version summarizing the key points of this lesson….
A carry trade is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency. Generally, the proceeds would be deposited in the second currency if it offers a higher interest rate.
The carry trade strategy is best suited for sophisticated individual or institutional investors with deep pockets and a high tolerance for risk. Carry trades are popular when there is ample appetite for risk.
However, if the financial environment changes abruptly and speculators are forced to unwind their carry trades, this can have negative consequences for the global economy. But as the global economy deteriorated in the financial crisisthe collapse in virtually all asset prices led to the unwinding of the yen carry trade.
Key Takeaways A carry trade examples trade is a trading strategy that involves borrowing at a low-interest rate and re-investing in a currency or financial product with a higher rate of return. Because of the risks involved, carry trades are appropriate only for investors with deep pockets.
This carry-trade strategy may net you either a profit or a loss. How Do Carry Trades Work? This tactic is the siren call of the carry trade.