carrytrade

[spotbabe]

I heard something about "carry traders". What exactly does "carry traders/carry trade" mean?

Thank you..

[FXharpoon]

There are really 2 different meanings of the term "carry trade". Among those of us who trade in Forex it can mean that you are holding a trade overnight for a period of more than one day and in that case you are charged or credited the interest rate differential between the 2 currency pairs. However, many brokers make up their own interest rates so that they are consistently over twice as high on the negative side as on the positive. Very few brokers have interest rates that actually represent the difference between the 2 countries' interest which obviously would be equal on the positive and negative side because it is a difference between 2 numbers.

In the financial world that extends beyond our niche of spot Forex, "carry trade" refers to all the investments among large funds and institutions in which they hold a currency to earn that interest over time. Apparently their investments may not be spot Forex currency pairs but could be the actual currency or other investments that are tied to that currency. Someone more knowledgable about that area could explain it better but for practical trading purposes in spot Forex a "carry trade" can just mean a trade that is held for more than one day in which interest is charged or credited. Interestingly the majority of traders only hold trades for less than one day, but I normally only enter a trade for a minimum of 3 days.

[spotbabe]

Thank you for that wonderful explanation..

You really said it well..

good post!

[damien_lee]

Here's what the carry trade means to Forex spot traders:

Basically, carry trades occur when financial institutions borrow money using a low-interest currency to purchase another high-interest currency.

And they do this to profit from the difference in interest rates.

To illustrate,

I borrow $1,000 cash from Bank A at 2% per year, and put the money into Bank B with gives me 3% per year in interest. At the end of the year, I withdraw $1,030 from Bank B (plus interest), and repay $1,020 to Bank A for the loan.

In total, I will have a profit of $1,030 - $1,020 = $10

This is an almost sure-win (arbitrage) situation.

This is generally what carry trades are about.

In the currency market however, things can get a little more complicated, because you are borrowing in one currency to invest in another. If the exchange rate between these two currencies change, you may very possibly lose money instead of gaining any.

Please drop me a message if you'd like further clarification about carry trades.

Thanks!