A currency carry trade is a strategy whereby a high-yielding currency funds the trade with a low-yielding currency. The carry trade is one of the most popular trading strategies in 外匯套利 forex market. The currency carry trade is one of the most popular trading strategies in the currency market.
Consider it akin to the motto “buy low, sell high. JPY, since these have interest rate spreads that are very high. The funding currency is the currency that is exchanged in a currency carry trade transaction. A funding currency typically has a low interest rate. Many people are jumping onto the carry trade bandwagon and pushing up the value of the currency pair. But a period of interest rate reduction won’t offer big rewards in carry trades for traders. That shift in monetary policy also means a shift in currency values.
A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used. As an example of a currency carry trade, assume that a trader notices that rates in Japan are 0. 5 percent, while they are 4 percent in the United States. This means the trader expects to profit 3.
After a year invested at the 4 percent U. Now, the trader owes the 50 million yen principal plus 0. If the exchange rate stays the same over the course of the year and ends at 115, the amount owed in U. The trader profits on the difference between the ending U. If the exchange rate moves against the yen, the trader would profit more.