The carry trade is an investment strategy that involves borrowing in a currency with low interest rates and investing those funds in assets denominated in a currency with higher interest rates. If the interest rate of the asset is higher, the investor will achieve a net profit.
While the carry trade can be profitable, it carries significant associated risks. For example, currency exchange rate volatility may lead to losses if the currency in which one is investing depreciates against the currency of the loan. Furthermore, changes in the interest rates of the home country can increase the cost of the loan, affecting the profitability of the strategy. Additionally, economic or political factors may influence the stability of financial markets, creating uncertainty.
The carry trade is popular among investors in a global low interest rate environment. However, it is important to take into account the risks and market volatility, as a reversal of trends can result in significant losses. This technique aims to benefit from the difference between rates, generating a profit known as the "carry."
The mechanics of the carry trade follow several steps: investors borrow in currencies with low interest rates, like the Japanese yen or Swiss franc, and then invest the funds in assets in countries with higher interest rates, such as Brazil or Argentina. Profits come from the gap between the cost of the loan and the return on investment.
In summary, the carry trade offers the potential for high returns in a context where income from traditional investments is limited.
