When there is a disparity in interest rates between countries, investors have an opportunity to employ a currency trading strategy called the carry trade. By borrowing in one currency and buying bonds in another, based on certain economic assumptions, an investor can execute a carry trade. But how does this strategy work and what type of environment is required? Salman Khan of the Khan Academy explains in a simplified example.
From this video, you’ll understand:
- The basics of the carry trade
- The circumstances that must be in place for a successful carry trade.
- Risks and rewards of a carry trade