Samuel D121_ Davis#76

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What is carry trading in forex?

Carry trading involves borrowing in a low-interest currency and investing in a high-interest one, profiting from interest rate differentials. For example, borrowing JPY to buy AUD earns a positive “carry.” Traders receive swap payments for holding such positions overnight. Carry trades are most effective in stable markets with clear rate differentials. However, they carry risk during crises, as high-yield currencies collapse and erase profits. Carry traders often face sudden “unwinds” when markets shift. While historically profitable, this strategy requires monitoring global monetary policy and market sentiment.