carry trade

Definition

Borrowing money in a currency with low interest rates, then investing it in assets with higher returns elsewhere, pocketing the difference. Works brilliantly until exchange rates move against you and your 'free money' becomes very expensive.

Example Usage

Investors executed a carry trade borrowing yen at 0.1% to buy Australian bonds yielding 4%, until the yen suddenly strengthened and wiped out their gains.

Origin

From the concept of 'carrying' a position over time to capture interest rate differentials, popularized in currency markets.

Fun Fact

The yen carry trade was so popular in the 2000s that its unwinding during the 2008 crisis contributed to market volatility worldwide.

Source: Foreign exchange and fixed income markets

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