The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis

2

Currency Carry Trades and Their Role in the Global Economy

Currency Carry Trades

THE MOST WIDELY UNDERSTOOD FORM OF CARRY TRADE is the currency carry trade. Indeed, in much financial commentary the term “carry trade” is synonymous with “currency carry trade.” If a speculator were to implement a simple currency carry trade, he would borrow in a low interest rate currency and invest the funds borrowed in a high interest rate currency. He collects the difference in the two interest rates, or the interest rate spread, which is his income from the trade.

The risk is that the high interest rate currency depreciates in value against the low interest rate currency, and the capital loss on the currency depreciation ends up being greater than the income ...