What is Currency Carry Trade and How Does it Work?
To take advantage of the difference in interest rates, currency carry trades include borrowing a low-yielding currency and using it to purchase a higher-yielding currency. This is a crucial component of a carry trading strategy and is sometimes called “rollover.” Traders are drawn to this technique to earn daily interest payments in addition to any currency appreciation from the real deal.
This post shows a top carry trade trading method and an explanation of FX carry trades using examples.
WHAT IS AND HOW DOES A CURRENCY CARRY TRADE WORK?
An FX carry trade is borrowing money in a nation with a low-interest rate (low yield) to pay for the purchase of money in a nation with a high-interest rate (high yield). The trader will get interested based on the “positive carry” of the deal if they keep this position overnight.
The currency with the lower yield is known as the “funding currency,” while the currency with the greater yield is known as the “target currency.”
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