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School of Pipsology
Undergraduate – Freshman
Carry Trade
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Did you know there is a trading strategy that can make money if the price stayed exactly the same for
long periods of time?
Well, there is and it’s one the most popular ways of making money by many of the biggest and baddest
money manager mamajamas in the financial universe!
Carry Trade
A carry trade involves borrowing or selling a financial instrument with a low interest rate, then using it to
purchase a financial instrument with a higher interest rate.
While you are paying the low interest rate on the financial instrument you borrowed/sold, you are
collecting higher interest on the financial instrument you purchased.
So your profit is the money you collect from the interest rate differential.
With that borrowed money, you turn around and purchase a $10,000 bond that pays 5% a year.
Anyone?
You got it! It’s 4% a year! The difference between interest rates!
By now you’re probably thinking, “That doesn’t sound as exciting or profitable as catching swings in the
market.”
However, when you apply it to the spot forex market, with its higher leverage and daily interest
payments, sitting back and watching your account grow daily can get pretty sexy.
To give you an idea, a 3% interest rate differential becomes 60% annual interest a year on an account
that is 20 times leveraged!
The bank won’t just lend a million bucks to anybody though. It requires cash collateral from you:
$10,000.
Then you turn around, walk across the street to another bank and deposit the $1,000,000 in a savings
account that pays 5% a year.
In this section, we will discuss how carry trades work, when they will work, and when they will NOT
work.
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Not everything that can be counted counts, and not everything that counts can be counted.
Albert Einstein
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