Carry Trade


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Carry Trade

For the bond market, this refers to a trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose(and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occured, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher. For currency, you buy the currency that has the highest local short term interest rate. For more information on currency, see: Currency Carry Trade.

Cash Contract

A trade of a security or a derivative where settlement occurs on the same trading day. This is fairly unusual; most contracts are settled between one and three days later. Generally speaking, cash contracts are most common in the last week of the calendar year when many trades must be settled sooner to guarantee tax advantages for one or both parties. It is also called a cash trade.
References in periodicals archive ?
We have positioned our portfolios to profit from when the currency carry trade inevitably unwinds," said Singer.
Declines in the value of the yen can decrease hedge funds' costs of repaying yen loans and make yen carry trades profitable.
interest rates and dollar depreciation are consistent with an ongoing carry trade.
The latest figures illustrate a continued move away from trading the carry trade in Q1 2009 over Q4 2008, once one of the most favoured strategies employed by traders, with trading on the Pound/Australian Dollar, New Zealand Dollar/US Dollar and US Dollar/Japanese Yen down 81 per cent, 74 per cent and 28 per cent respectively globally.
Once the dollar carry trade starts to steadily unwind, problems in emerging markets could intensify.
He added : "The unwinding of the yen carry trade may bring a new wave of capital flow to Asia and Hong Kong, but we have not seen this trend at the moment.
We can't say for sure whether this policy will lead to a yen carry trade and flooding in cheap foreign funds (on the local markets) because there are a lot of stages that such a policy has to go through before leading to actual carry trades," a senior official at the Bank of Korea said.
The difficulty in explaining the profitability of the carry trade with conventional risk factors has led researchers such as Lustig, Roussanov, and Verdelhan (2011) and Menkhoff, Sarno, Schmeling, and Schrimpf (2012), (8) to construct empirical risk factors specifically designed to price the average payoffs to portfolios of carry-trade strategies.
For this reason, the Monetary Board continues to be vigilant that the SDA does not become the target of any carry trade.
dollar loans at offshore banking units of domestic banks, which are fund maneuvering center for many Taiwanese businesses, underscores the prevalence of carry trade.
However, an even better option may be the forex carry trade.
Boris Schlossberg, director of research at GFT Forex in New York, said the carry trade has "come back with a vengeance" and the "yen could assume its former status as the funding currency for the carry trade, weakening progressively as rates in the rest of the G-20 begin to rise.