Carry trade
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
A carry trade means borrowing in a currency with low interest rates, such as the Japanese yen, and investing the money in higher-yielding assets in another currency. The investor earns the gap between the two interest rates. The trade carries a risk. If the borrowed currency suddenly rises in value, investors rush to repay their loans and sell their assets together, which shakes markets.
Example
In August 2024, the Bank of Japan raised interest rates and the yen jumped. Investors who had borrowed in yen rushed to close their positions. This yen carry-trade unwind hit global markets, including India.
Related concepts
- Foreign exchange market
- Foreign exchange
- Foreign exchange rate
- Demand for foreign exchange
- Supply of foreign exchange
- Flexible exchange rate
- Currency depreciation
- Currency appreciation
- Currency speculation
- Interest rate differential