Carry trade

Carry trade

It is a type of trading in which a trader sells a certain currency with a low interest rate and then uses it to purchase another currency that yields higher interest. The main goal of a carry trader is to capture the existing divergence in interest rates and earn substantial profits with help of leverage.

Assume you notice that interest rates in South Africa are 7%, while the current interest rates in the US are 1%. So, you expect to earn 6% difference between the two rates. For this to happen, you should borrow USD (the low-yielding currency, the issuer of which set a relatively low interest rate), and buy a higher-yielding currency, in our example it is South African Rand. You may increase the amounts of money you earned using leverage. For example, if you use a standard 10:1 leverage ratio you can earn a profit of 60%. But there is a big risk behind this – the unpredictability of exchange rates. If the ZAR was to drop against the USD, you would lose a great part of your return.

So, although carry trades look very attractive, they are quite risky especially in troublesome, uncertain times when investors tend to rush into low-yielding safe-havens neglecting risky financial assets, which offer higher returns.

Profits earned through the carry trade may not be a primary goal of the trader, they could be a good addition to the gains he/she earns on price fluctuations. 

Example of a trader

Julian-Robertson.png

Julian Robertson is one of the most famous carry traders the history knows. He used to trade USD/JPY. In the period between 1995 and 1998, this currency pair appreciated more than 66%, in part thanks to carry traders buying high-yielding currencies and selling the yen. The trader could make 15% profits on the interest rate differentials adding to 66% he gained on the surge in USD/JPY. Julian Robertson was trading USD/JPY with leverage and earned lots of money in that period, although after the 1998 sudden appreciation of the yen, he lost $2 billion.

Popular

America will probe German and Japanese car makers over alleged patent violations

America’s on the verge of starting an investigation into whether thermoplastic components utilized in some Japanese as well as German vehicles sold in the country violate its patent laws or not…

Gold edges down toward 3-week minimum after Congress hits spending deal

On Monday, gold headed south in European trade, making its way toward a three-week minimum after American congressional leaders came to an agreement to fund the government via the fall, thus easing worries as for a shutdown of the federal government…

Crude edges down in Asia on Caixin PMI

On Tuesday, crude prices traded weaker because a poll on Chinese manufacturing came in weaker than expected and market participants looked ahead to American inventories on oil as well as refined products to set the overall tone…

Deposit with your local payment systems

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Internal error. Please try again later

Beginner Forex book

The most important things to start trading
Enter your e-mail, and we will send you a free Beginner Forex book

Thank you!

We've emailed a special link to your e-mail.
Click the link to confirm your address and get Beginner Forex book for free.

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera