What is Carry Trade?

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Accepted Answer

The Carry Trade is a foreign exchange (FX) strategy where a trader borrows a low-interest-rate currency, known as the funding currency, and simultaneously invests the proceeds in a high-interest-rate currency, the target currency, with the primary goal of profiting from the positive interest rate differential, or "carry."

Carry Trade

What is Carry Trade?

What is the exact mechanism of a Forex Carry Trade and how is the profit calculated using interest rate differentials?

What are the primary risks associated with the Carry Trade and how can traders attempt to hedge against them?

How have historical examples, such as the Japanese Yen and Australian Dollar, illustrated the potential and pitfalls of the Carry Trade?

How does the Carry Trade differ from true Arbitrage and what role does Hedging play in transforming the strategy?

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