# Carry Trade Strategy In Forex

In this blog, we will learn about the Forex Carry Trade Strategy, through various examples and understand the various aspects of the Carry Trade Strategy.

We'll cover:

Let's begin! Simple forex carry trade strategy is where the funds from the high-yielding currency rate are invested in low-yielding currency rate to leverage the difference between forex rates.

There are a lot of questions that pop up when we read the classic definition.

• Why the word Carry?
• Why only in the Forex market?
• What do we earn in this trade?
• Isn’t this arbitrage opportunity?
• If it is arbitrage, would there be more risk?

Let’s take a step back and answer one at a time.

The word Carry means the returns we obtain for holding an asset. When we ‘Carry’ commodities for a long time, we end up with negative returns as they incur storage costs. But this is not the case in the Forex market. We do not actually Carry any physical entity.

## What is Carry Trade Strategy in Forex? Why only the Forex market?

The carry trade strategy is not finite to the forex market. It is popular in the forex market as the difference in currency rates exist in the market quite often. Up until the Global financial crisis, these trade strategies generated persistent positive returns.

In 2008 these trade strategies blew up which weakened the case of predictable forex returns. For example, the USD/JPY exchange rate took almost 5 years to recover after the crisis in 2008.

Despite the above risk, you can always leverage this strategy provided you did decent market research before investing.

## What do we earn in carry trade strategy?

In carry trade strategy you earn the interest. When you take a long position in the currency you are gaining the interest and when you take a short position you are paying the interest. The difference in the interest rates multiplied buy your notional is your profit. For example, let’s take one of the most traded forex currency EUR/USD. As of today, the LIBOR interest rates of USD and EUR are as follows.

• USD - 2.379 %
• EUR - -0.476 %

Suppose we took a short position in EUR/USD currency with a notional of 100,000 dollars. The interest can be calculated as follows:

(Interest Rate of the long currency – Interest Rate of the short currency) x notional

In our case,

## How to be successful in forex carry trade strategy?

To be successful in forex carry trade strategy we should know when to get in and when to get out. Best time to get in would be when there is a piece of information from central banks about increasing rates in a country and once there is a spur about the news and more people start investing you should make optimal returns and exit from that particular forex rate. Traders sometimes reverse their positions if they see a big opportunity.

## Conclusion

As per the above-gained knowledge in forex carry trade strategy, it should be the investors' favourite strategy which gives positive returns forever. Unfortunately, this is not what we observe in the market. The positive side of the existing differential in forex rates makes it riskier with time.

As these are actual opportunities existing in the market and evident for most of the people makes everyone go after them and makes it riskier. The interest rate of a country which we buy to take advantage of the differential increases as more people buy it. Especially during a crisis, the market moves very quickly and leads to large negative returns.

One example would be the movement in YEN currency during the Global financial crisis in 2008, up to 30% movement against GBP currency in 5 hours. So it is advised to be careful and take precautions such as implementing a Stop/Loss strategy.