Carry Trade
A carry trade borrows in a low-yield currency to buy a high-yield one, collecting the interest difference while holding.
A carry trade buys a high-yield currency funded by a low-yield one, collecting the interest difference while holding. The swap pays you, but sharp moves in the funding currency can swamp the carry.
A carry trade is a strategy of buying a high-interest currency and funding it with a low-interest currency, collecting the interest rate differential as long as the position is held. The profit comes from swap, not from price direction, though price moves can swamp the carry. Classic carries pair the yen or franc (low yields) against the Australian or New Zealand dollar (historically higher yields). The trade unwinds violently when risk appetite turns and the funding currency strengthens.
How It Works
- Long the high-yield currency, short the low-yield one
- Swap is credited daily at rollover
- Unwinds are violent when risk appetite drops
Trading Tips
The carry is known; the price risk is not - size for drawdown
Check the actual swap rate your broker pays, not the textbook differential
Carry works in calm trends and dies in risk-off spikes
Related Terms
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