Sunday, January 22, 2012

Carry Trade

The so-called "carry trade" is when an investor borrows at a low interest rate and simultaneously invests at a higher interest rate. The most common example of a carry trade is when currency investors go long (buy) a currency with a high interest rate, and short (borrow) a currency with a low interest rate; over time the currency investor will earn money from the positive difference between the interest rates (also known as interest rate differential. However that currency investor will also be exposed to movements in the exchange rate, and may end up taking a loss if the exchange rate moves against them by more than which they expect to gain from the positive carry. Active fixed income fund managers will often take advantage of carry trades.

Similar Fund Terms: Active fund, Interest differential, Active Investment

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Fund Management Terminology and Concepts Explained: www.fundterms.com

1 comment:

  1. Good definition, if you are interested in the carry trade check out the Carry Trade Index

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