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 ?
2013: Carry trade and foreign exchange rate puzzles.
Our thanks to Bloomberg for bringing us Bank of America Merrill Lynch's assertion that investment in the carry trade - that ever-so-popular trading strategy that entails borrowing in low-interest currencies to invest in high-yielding ones -- is entering dangerous territory.
2009), they associated risk reversals with the level of interest rate differentials, meaning that expected carry trade returns compensate investors for the risk of a sharp depreciation of the target currency.
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.
Investors are adapting to the change by using a wider variety of currencies and doing carry trades for shorter durations, instead of leaving them on for weeks or months.
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.
The bank said that it was considering action against activities such as carry trades that involve its short-term deposits that pay more than longer-dated government debt.
dollar loans and leading to the surge of carry trade again.
However, an even better option may be the forex carry trade.