Educational Post

What is a Carry?

A carry trade is a strategy in which you borrow money in a currency with a low interest rate and invest it in a different currency or asset that offers higher returns. The idea is simple: you seek to profit from the difference between those rates.

While this strategy is primarily used in the world of forex and currency trading, it can also be applied to stocks, bonds, and even commodities.

How Carry Trades Work

Here's how it typically works: You take out a loan in a currency that has low or near-zero interest rates—think of the Japanese yen (JPY), which has had low rates for years. Then, you convert that money into a currency with a higher interest rate, like the U.S. dollar. Once you have the higher-yielding currency, you invest it in something like U.S. government bonds or other assets that give you a good return.

For example, if you borrow a yen at 0% and invest it in something that pays 5.5%, you earn that 5.5%, minus any fees or costs. It’s like turning cheap money into more money (as long as the exchange rates play well).

Why Investors Use Carry Trades

Carry trades are popular because they offer a way to earn a consistent return on the interest rate difference, without needing the value of the investment to increase. This makes them a favorite among large players like hedge funds and institutional investors, who have the tools and knowledge to manage risk.

Often, investors use leverage in carry trades, meaning they borrow much more money than they actually have. This can make the returns much greater — but it also means the losses can be just as great if things don’t go as planned.