Definition, How It Works, Example, and Risks
“A welcome period of relative stability in global markets has been upended by a sudden plunge in stock prices.” So begins a 2024 World Economic Forum report on the effects of major shifts in carry trades that year. This highlights the often overlooked yet powerful influence of these financial maneuvers on global financial markets.
In general, a carry trade is any strategy where an investor borrows capital at a lower interest rate to invest in assets with potentially higher returns. However, it’s best known for its use in foreign exchange (forex or FX) markets, where it’s defined as borrowing in a low-interest rate currency and investing in higher-yielding assets denominated in another currency, aiming to profit from the spread.
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