Carry trade

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Speculation - foreign currency.

A carry trade is a speculative foreign exchange trading strategy.

It involves borrowing a low interest-rate currency, and investing in a higher interest-rate currency.

The potential benefit to the trader is the interest differential between the higher interest income receivable, and the lower interest expense payable.

The downside is the loss on the likely depreciation of the higher interest-rate currency invested in.

The depreciation is explained by the International Fisher Effect.

The losses on the currency depreciation can exceed the interest rate gains by many times.

For this reason, it is a very high-risk form of speculation.

See also