The carry trade
Earning the interest rate gap between two currencies, and the risk that comes with it.
Start the chapter3 lessons · 1 tools
Lessons
- 01What is a carry trade?A carry trade buys a currency with a higher interest rate against one with a lower rate and holds the position to collect the difference. In retail forex the carry arrives as a daily swap credit, minus the broker's markup. The risk is the exchange rate: a modest price move can erase months of interest.
- 02How carry shows up in your swap.The swap is the daily interest you earn or pay for holding a currency position overnight. In theory it equals the interest rate gap between the two currencies, which is the carry. In practice your broker subtracts a markup from both sides, so a positive swap shrinks and a negative one grows.
- 03When the carry trade unwinds.A carry trade unwinds when many holders close it at once, usually after a risk-off shock or a change in interest rate expectations. The low-yield funding currency, such as the yen, jumps, and the carry pair can fall in days by more than the trade earned in months or years of swap.