The economy
Carry trade
Borrowing in a low-interest currency to invest in a higher-yielding one, keeping the difference.
How it works
The trade earns the interest-rate gap for as long as the exchange rate cooperates. It has been persistently profitable over long periods.
Its return profile is heavily negatively skewed: small steady gains punctuated by rapid, severe losses when the funding currency strengthens.
Where it misleads people
Carry trades unwind violently and all at once, because everyone is in the same position and exits through the same door.
Related terms
- Exchange rateThe price of one currency in terms of another.
- SkewnessWhether a return distribution leans towards large gains or large losses.
- Currency riskThe risk that exchange-rate moves change your return on a foreign holding.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
More in The economy
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.