What is a Carry Trade in Forex?

A “carry trade” (or carry trade interest rate strategy) is a technique in which a trader seeks to benefit from a difference in interest rates between two currencies. The basic idea is to:

• Borrow or sell a currency with a relatively low interest rate

and 

• Buy or hold a currency with a relatively higher interest rate.

For example, suppose Currency A has a lower interest rate than Currency B. Now, a trader may sell Currency A and buy Currency B to seek a “positive” interest-rate differential.

However, note that the exchange rate can also move against the trader. A fall in the value of the higher-interest-rate currency can offset or exceed the interest-rate benefit.

Additionally, the actual financing cost or return also depends on broker rates, market conditions, and rollover arrangements.

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