carry trade


The borrowing of money at a low interest in order to invest in a security or investment that provides a higher interest. For example, an investor believing that short-term interest rates will remain low might take out short-term debt to finance the purchase of long-term debt. The return on the investment would be the coupon of the long-term debt minus the cost of short-term borrowing. If the price of the long-term debt fell due to rising interest rates the investment becomes less profitable. As another example, a currency carry trade could involve an investor borrowing New Zealand dollars, which could have a low interest rate, to purchase a U.S.
dollar-denominated investment, which might have a high interest rate. If the interest rate on the investment declines, or if the exchange rate on the New Zealand dollar becomes unfavorable, the investor could lose money.

Use carry trade in a sentence

I decided to try out a carry trade which meant borrowing money, which I did not like to do,but would help me out in this situation.

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The portfolio manager used a carry trade to boost his client's portfolio after the government lowered interest rates on short-term loans.

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Many carry traders were wiped out during the Great Financial Crisis as market volatitily soared and the value of their security holdings plummented.

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dollar carry trade diversified carry basket