An Introduction to Forex Trading – a guide for beginners [PDF]

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An Introduction to Forex Trading – a guide for beginners – Book

the carry trade exploits differences in interest rates of one currency over another, in order to profit from the differential. To achieve this in practice, the carry trade relies upon the borrowing or selling of one currency with a low-interest rate, then using this to purchase a currency that is yielding a higher interest rate.

Whilst you are paying the lower interest rate on the currency you have borrowed, you collect the higher interest rate on the currency you have purchased. The difference between the two signifies a profit even when the price positions have remained flat.

A simple example of this would be: Consider if you were able to go to a bank and secure a loan for $10,000 at a rate of 2% and you then took this money and were able to put it in a savings account that paid 6%. You are essentially receiving a profit of 4% on the trade.

However, in reality, banks make this extremely difficult to do as they nearly always keep lending rates above those of the savings rate. The carry trade, therefore, is a very useful method of producing profits for financial traders and through Forex it can be a particularly profitable trading technique.