Carry trade.

In plain English

A carry trade borrows money where interest rates are low and puts it to work where rates are higher, keeping the difference. The gross profit is the rate gap, and the risk is the currency move, which can wipe the gap out several times over. Because the forward rate already prices in the interest difference, a carry trade is effectively a bet that the high-rate currency will not weaken as much as the forward implies. These positions tend to earn small steady returns for long stretches and then lose heavily in a few days when the funding currency spikes and everyone unwinds at the same time.

01Why it matters

You may never place one, but carry trades sit inside some funds and hedge fund strategies, and their unwinding is a common reason currency and stock markets move sharply on an otherwise quiet news day.

02The math, step by step

Say you borrow at 1 percent and lend at 6 percent on 100,000 dollars. The gap is 5,000 dollars a year. If the high-rate currency then falls 8 percent, that is an 8,000 dollar hit, so the trade loses 3,000 dollars even though the interest worked in your favor the whole time.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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