Business, Legal & Accounting Glossary
A carry trade is a transaction done between a country with a very low-interest rate and one with a higher rate which seeks to exploit this difference and create a profit. For example, a trader could borrow Japanese Yen at almost 0% and then loan it out in Thailand, for example, for 4%. The investor would earn the difference, minus his expenses.
The carry trade has positively been described as “3-3-3”: Buy at 3%, sell with a 3% profit, be on the golf course by 3 pm. It has also been termed a “free lunch”.
The carry trade has been negatively described as “picking up nickels in front of a steamroller” or “like having a free lunch in front of a steamroller”.
Like most investments, the carry trade is not without its risks. The main risk is currency risks. If the currencies fluctuate even a little bit they can entirely wipe out any carry trade gains made. They can often be large and unpredictable fluctuations.
Central bank interest rates can also change, but these risks are minor because they will almost never change so much that the margin is eliminated. Furthermore, prior to any changes, announcements or intentions of the changes will be made.
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This glossary post was last updated: 26th March, 2020 | 0 Views.