Carry trade
| Carry trade |
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| Wednesday, 17 September 2008 19:02 |
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Carry trade is a system of trading which involves borrowing or selling a financial instrument with a low interest rate. You then use it to purchase a financial instrument with a higher interest rate—meaning while you are paying the lower interest rate on the financial instrument you borrowed or sold, you are also collecting a higher interested on the financial instrument you purchased. This is your profit. In the forex market, since currencies are traded in pairs, you pay interest on the currency position you sell and then collect interest on the currency position you buy. Carry trading is can be helpful because the interest payments happen every trading day based on the trader’s position. All positions are closed the end of the day in forex—you just don’t see it happen if you hold a position to the next day. Brokers will close and reopen the trader’s position and then credit you the overnight interest rate between the two currencies. Carry trade has become very popular in the forex market because of the amount of leverage available. Before entering a trade it is always important to determine your risks and whether or not you should make your move. When looking for a good currency pair to do a carry trade, look for the following attributes: a high interest differential, and one that has been in an uptrend—where the currency you’re planning on going long has been increasing in value against the currency you are going short. |