Here's what the carry trade means to Forex spot traders:
Basically, carry trades occur when financial institutions borrow money using a low-interest currency to purchase another high-interest currency.
And they do this to profit from the
difference in interest rates.
To illustrate,
I borrow $1,000 cash from Bank A at 2% per year, and put the money into Bank B with gives me 3% per year in interest. At the end of the year, I withdraw $1,030 from Bank B (plus interest), and repay $1,020 to Bank A for the loan.
In total, I will have a profit of $1,030 - $1,020 =
$10
This is an almost sure-win (arbitrage) situation.
This is generally what carry trades are about.
In the currency market however, things can get a little more complicated, because you are borrowing in one currency to invest in another. If the exchange rate between these two currencies change, you may very possibly lose money instead of gaining any.
Please drop me a message if you'd like further clarification about carry trades.
Thanks!
