Definition
A carry trade involves borrowing in a low-interest-rate currency or instrument to invest in higher-yielding alternatives, profiting from the rate differential. Common examples include borrowing in Japanese yen to invest in U.S. or emerging market bonds. Carry trades are profitable until the funding currency appreciates sharply.
Formula
Carry = Yield on Investment - Borrowing Cost
Example
Borrow yen at 0.5%, invest in Brazilian bonds at 10%. Earn 9.5% carry unless yen appreciates against real.
FAQ
What is Carry Trade?
Borrowing at low rates to invest in higher-yielding assets.
How do you calculate Carry Trade?
A common formula for Carry Trade is: Carry = Yield on Investment - Borrowing Cost
Why is Carry Trade important?
Carry Trade helps investors evaluate trading strategies and make more informed decisions.