Carry Trade
Definition from Wikipedia.org:
The term carry trade without further modification refers to currency carry trade:
investors borrow low-yielding currencies and lend high-yielding ones. It tends to
correlate with global financial and exchange rate stability, and retracts in use
during global liquidity shortages.[2]
The risk of carry trades is that foreign exchange rates will change, and the investor will
have to pay back now more expensive currency with less valuable currency.[3] In theory,
carry trades should not yield a predictable profit because the difference in interest rates
between two countries should equal the rate at which investors expect the low-interest-rate
currency to rise against the high-interest-rate one. However, carry trades weaken the target currency,
because investors sell what they have borrowed, and convert it into other currencies.
See also other Words in the news.
