Carry trade

A position taken for the interest rate differential between two currencies rather than for a move in the exchange rate. Because a foreign exchange position is long one currency and short the other at the same time, holding it past the daily cut off means receiving the rate on one side and paying the rate on the other. The net of the two, adjusted by the provider's own charge, is applied to the account as the swap each night.

The size of the adjustment follows from the notional value of the position and the annualised differential, apportioned to a single day. One weekday carries a triple charge, because the value date of a spot position rolled that day lands after the weekend and three days of financing are settled at once. The differential itself moves whenever either central bank changes policy, so a position that carried a credit when it was opened can carry a debit later without anything else about it changing.

Two things are commonly missed. The daily amount is small next to the distance exchange rates travel, so a carry position is an exchange rate position first and an interest position second. And a provider's mark-up sits between the market differential and what reaches an account, which is why a positive differential does not necessarily produce a credit. Practitioners also observe that positions built on carry have historically unwound together and abruptly during periods of falling risk appetite, a pattern documented often enough to be named, though how well it predicts the next unwinding is disputed.