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
Carry Trade Example
Say you buy AUD/JPY when Australian rates sit near 4% and Japanese rates near zero. You collect the rate gap as daily swap while the pair drifts sideways, earning yield on a flat chart. Then one risk-off week drops the pair 5% and wipes a year of carry in days.
How Traders Use Carry Trade
Treat carry as income with crash risk attached. Size it small, avoid funding currencies during panics, and remember the exchange rate move almost always matters more than the interest collected.
Related Terms
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