Carry Trade involves 2 steps:
1) Borrowing or selling a financial instrument at a low cost. Eg. taking an interest free loan from the government (In the case where the government wants to stimulate a particular market)
2) Lending or purchasing a financial instrument at a higher interest as compared to what you borrowed. Eg. a special long term fixed deposit which gives you a 15% interest.
This allows you to gain 15% (the difference of the spread between the interest gain and the cost of borrowing)
However, it is good to bear in mind that this is not a arbitrage strategy because if the market works against your investment, you are bound to lose money. This strategy needs stable investments and borrowings that does not fluctuate wildly.
Carry trade can be executed in a few markets such as interest rates, currency and many more.
1) Borrowing or selling a financial instrument at a low cost. Eg. taking an interest free loan from the government (In the case where the government wants to stimulate a particular market)
2) Lending or purchasing a financial instrument at a higher interest as compared to what you borrowed. Eg. a special long term fixed deposit which gives you a 15% interest.
This allows you to gain 15% (the difference of the spread between the interest gain and the cost of borrowing)
However, it is good to bear in mind that this is not a arbitrage strategy because if the market works against your investment, you are bound to lose money. This strategy needs stable investments and borrowings that does not fluctuate wildly.
Carry trade can be executed in a few markets such as interest rates, currency and many more.
