Macro
Carry Trade
The appeal of a carry trade is the steady income earned from the interest-rate gap between two currencies. Traders borrow where money is cheap, such as the yen historically, and deploy it where yields are higher.
The catch is currency risk. If the funding currency suddenly strengthens, the exchange-rate loss can wipe out years of accumulated carry, sometimes in a matter of days. That is why carry trades are described as picking up pennies in front of a steamroller.
Because these trades depend on calm markets and stable rate differentials, they tend to unwind violently during risk-off episodes, amplifying volatility across global markets.
Example
For years traders borrowed cheap yen to buy higher-yielding assets, a carry trade that unwound sharply when the yen spiked.
Carry Trade — FAQ
What is Carry Trade?
A carry trade is a strategy of borrowing in a low-interest-rate currency and investing the proceeds in a higher-yielding currency or asset to pocket the difference.
Can you give an example of Carry Trade?
For years traders borrowed cheap yen to buy higher-yielding assets, a carry trade that unwound sharply when the yen spiked.
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