Currency Carry Trade

Currency Carry Trade

A carry trade where you borrow and pay interest in order to buy something else that has higher interest. For currencies, it might be that you borrow in Yen (where the interest rate might be low) and use the proceeds to purchase U.S. dollar long term debt. While the trade might produce a positive return, it is risky in two dimensions. First, U.S. rates could increase diminishing the value of the bond you purchased. Second, the exchange rate could take an unfavorable move effectively increasing your borrowing costs. Related: Carry Trade.

Currency Carry Trade

A position in which a trader borrows money in one currency at a low interest rate and lends the same money in another currency at a higher interest rate. A currency carry trade derives its profit from the exchange rate between the two currencies and the difference in interest rates. The major risk associated with a currency carry trade is that the exchange rate will move in an adverse direction, eliminating the profit from the interest rate difference.
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A currency carry trade is a strategy in which investors borrow a currency with low interest rate and buy a currency, which yields a relatively higher interest rate.
We have positioned our portfolios to profit from when the currency carry trade inevitably unwinds," said Singer.
Currency carry trades implemented within G10 currencies have historically delivered significant excess returns with annualized Sharpe ratios in excess of one.