Carry Trade
Carry Trade is a strategy for making money on the difference in interest rates.
There is also a shorter definition - this is percentage arbitrage. In its simplest form, the Carry Trade strategy can be represented as follows: an investor takes a loan at 10% and invests the entire amount on a deposit at 13%. The 3% difference is his net profit. It would seem that everything is quite simple, you can earn money without investment. But in reality this is not so.
Any investment is a risk. In the example of investing at 13%, the investor takes all the risks. And if they are implemented and the deposit, for example, is frozen, or the bank "bursts", then the investor remains indebted to the credit institution not only the loan amount, but also the interest accrued on it. And there can be many reasons for this:
- changes in exchange rates, interest rates;
- political or economic instability;
- rising inflation;
- internal instability of the banking institution.
It is known that in the financial market the amount of profit from investments is directly related to risk: the higher it is, the greater the return on investment. And here, if we go back to our example, we get an interesting situation: the investor will earn only 3%, while the risk is 13%. It is for this reason that investors who decide to use the Carry Trade strategy are better off using assets with minimal risk, in which the probability of a negative result is reduced to zero.
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Usually government bonds act as an object of Carry Trade. An investor will earn if he takes a loan in one country and invests this money in another, and the currencies must also be different.
Each country has its own inflation rate and interest rates. Real income in a particular country, simplified, can be calculated as follows: subtract the percentage of inflation from the nominal rate. For example, a government bond is traded at 8% yield, and inflation in the country is 5%, respectively, the real rate of return will be 8-5=3%. If an investor has the opportunity to take a loan in one country at a low rate, for example, 2%, then he has the opportunity to implement Carry Trade.
The Carry Trade strategy, as a rule, is of interest to investors who already have impressive capital, since the income from such a strategy is small, and if something goes wrong, they can painlessly endure the damage.
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