Carry Trade

A carry trade is a strategy where a trader buys a currency with a higher interest rate while selling (funding with) a currency with a lower interest rate, aiming to profit from the interest-rate differential paid as a positive swap, in addition to any favorable price move. Classic examples have involved funding in low-rate currencies like the yen to buy higher-yielding currencies. Carry trades work well while conditions are calm but can unwind violently and quickly during risk-off shocks, when everyone tries to close the same trade at once.