Forex glossary
Carry Trade
Carry trade funds exposure to a higher-yielding currency with a lower-yielding currency. Returns combine financing income or cost, exchange-rate movements and trading costs. A broker's swap can differ from the simple policy-rate differential, and an adverse exchange-rate move can exceed the interest income.
Illustrative example
How does it work in practice?
In a hypothetical position, positive financing earns 100 PLN while an adverse exchange-rate move loses 400 PLN. Before other costs, the result is −300 PLN; positive carry does not make the trade profitable.
A case to work through
Three result components
A hypothetical position earns +80 USD carry, loses 150 USD on price and incurs 25 USD other charges.
- Add 80 − 150 − 25 = −95 USD.
- Compare positive funding with the negative total result.
What follows? Assess the full exposure rather than the interest differential alone.
Example boundary: Funding amounts are assumptions, not broker pricing derived solely from policy rates.
A useful distinction
Carry Trade / Interest Rate Parity (IRP)
Carry trade retains FX risk; covered parity links interest rates to a contracted forward rate.
Check your understanding
Split a position's result into carry, price movement and costs.
Show the answer and explanation
−40 USD
60 − 90 − 10 includes all components.
Rates, exposures and market measures
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Read the fuller explanation
Related terms
Sources and documentation
- bis.org
- BIS — Covered interest parity lost: understanding the cross-currency basis
Covered interest parity as a benchmark, and reasons real forwards can deviate. This is not a future spot forecast.
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The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.