Carry trade

Carry trade in currencies involves the selling of a currency with a low interest rate and uses the proceeds to buy another currency with a high interest rate. As long as the currency with a high interest rate does not go down in value, the carry trade will produce profits for the trader via interest rate differences.

Another example will be borrowing money from a bank in a country where the interest rate is zero. The money borrowed can be used to buy another foreign currency with a 5% interest rate. The profit for the trader will be 5% as long as the exchange rate between the two currencies are stable.

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