What is Carry Trade?

There is a trading method that can make money if the price remained precisely similar for a long time.

It is one of the most famous ways of making money by many of the largest and baddest money manager mamajamas in the financial world.

It is  called the “Carry Trade.”

Carry Trade

A carry trade includes borrowing or selling a financial instrument with a low interest percentage and then using it to buy a financial instrument with a higher interest rate.

Although you are paying the low interest percentage on the financial instrument you sold/borrowed, you are accumulating higher interest on the financial instrument you purchased. Therefore, your profit is the money you accumulate from the interest rate differential.

Here is an example:

Let’s say you go to a bank and borrow $10,000. Their lending fee is 1% of the $10,000 every year.

With that borrowed money, you turn around and purchase a $10,000 bond that pays 5% a year.

The profit is 4%  per year! It is the difference between the interest rates.

And if you are thinking that it does not sound as thrilling or profitable as catching swings in the market, think again.

Because, when you apply it to the spot forex market, with its higher leverage and daily interest payments, sitting back and watching your account increase daily can get pretty good.

 Just to give you an idea, a 3% interest rate differential becomes 60% annual interest a year on an account that is 20 times leveraged!

In our next discussion,  we will talk how carry trades work, when and when they will not work.

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