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How Carry Trade Works

A carry trade is a trading technique that involves borrowing money at a low rate of interest and investing it in a higher-yielding asset. A carry trade involves borrowing money in a low-interest currency and then transferring the money into another currency. If the second currency offers a greater interest rate, the funds are usually placed there. The proceeds could alternatively be invested in assets denominated in the second currency, such as equities, commodities, bonds, or real estate.

The risk of a rapid drop in the value of the assets a trader has invested in. When the funding currency differs from the borrower’s local currency, there is an implied exchange risk or currency risk. Trading in the direction of carry interest could have the added benefit of collecting interest on top of the trading profits. Carry trading could also allow a trader to benefit from leverage. When a trader receives daily interest from their broker on a carry transaction, the interest is calculated on the leveraged amount. For example, if a trader opens a transaction for one mini lot (10,000 USD) and only uses $250 of actual margin to do so, they will be paid daily interest on the $10,000, not the $250. It could build up to a lot of money in a year’s time.

Currency risk in a carry trade is rarely hedged since using currency forwards or contracts that lock in the exchange rate for a specific time in the future would either add to the cost or negate the favorable interest rate differential. The carry trade involving the Japanese yen, for example, had surpassed $1 trillion by 2007, as the yen had become a preferred currency for borrowing due to near-zero interest rates. 

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 This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. Trust Capital TC Ltd does not take into account your personal investment objectives or financial situation. Trust Capital TC Ltd makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of Trust Capital TC Ltd, a third party or otherwise.

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