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 ?
2014: U1P, the carry trade and Minsky's financial instability hypothesis in the CEE and CIS.
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.
Section 4 examines the relationship between global risk aversion, carry trade returns, risk reversals and interest rate differentials in VAR models estimated for each country.
After starting the week on a high on the back of risk aversion and interest in the carry trade, the yen has subsequently declined with USD/JPY now trading around 101.77.
The dollar carry trade is the pool of cheap money that serves as the world's highly liquid source of funds for trading and investment.
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.
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 at offshore banking units of domestic banks, which are fund maneuvering center for many Taiwanese businesses, underscores the prevalence of carry trade. Statistics of Taiwan's central bank show that as of the end of February this year, outstanding U.S.-dollar loans at OBUs topped US$60.8 billion, up 40% over a year earlier and boosting the total assets of OBUs to US$154 billion, a record high.
The carry trade involves buying a high-yielding currency against a low-yield currency.<span style="mso-spacerun: yes;"> </span>Going long AUD/USD is an example.<span style="mso-spacerun: yes;">&nbsp; </span>Historically, the carry trade has been highly correlated with global economic growth and thus the equities market.