What is a carry trade? How forex traders earn from interest rate gaps
By SendPay Business · · 2 min read
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A carry trade is a forex strategy where a trader borrows in a currency with a low interest rate and uses it to hold a currency with a higher interest rate. The aim is to earn the gap between the two rates, known as the interest rate differential.
How it works
- Borrow in a currency whose central bank rate is low.
- Exchange it into a currency whose rate is higher.
- Hold the higher-yielding currency and earn its interest.
- Pay the lower interest on the loan and keep the difference, if the exchange rate holds.
A well-known example
For many years the Japanese yen had very low interest rates, so traders borrowed yen to buy higher-yielding currencies. This became known as the yen carry trade.
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The main risk
If the higher-yielding currency falls against the one borrowed, the loss on the exchange rate can wipe out the interest earned, and more. When many traders exit at once, carry trades can unwind quickly and move markets sharply. Leverage makes both the gains and the losses larger.
Where SendPay fits
SendPay does not offer forex trading, leverage or hedging. A SendPay platform lets your customers hold GBP, EUR and USD and exchange between them at a fee you set, which suits businesses and people who need currency for payments rather than speculation.
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Questions people ask
How much can the currency fall before the interest is gone?
Put your rates and amount into the free calculator to see the break-even move.
Carry trade calculator →How do interest rates move exchange rates?
Why rate changes push currencies up or down.
Rates and FX →Can I offer currency exchange in my own app?
Yes, with multi-currency accounts on a branded platform.
See platforms →Read next
Spotted a mistake or something out of date? and we'll fix it. How our guides are made
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. Other companies named in this guide are reference points only and are not affiliated with SendPay Business.