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what is a carry trade in forex?

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@brenda_lesotho - 1 year ago - Forex Trading Strategies

Please can someone explain what a carry trade is and how i can execute it profitably

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@randolf_mercer - 1 year ago

A carry trade is when you leave a trade open overnight so that you can earn the difference in interest rates between the two currencies that make up the forex pair you are trading.

For example, in South Africa the Reserve Bank has set the Repo interest rate at 7.25% and in the USA the Federal Reserve interest rate is around 4.50%, so if you carry a USD/ZAR sell trade over till the next day, your broker will pay you an interest of (7.25% - 4.5%) = 2.75%

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@tiny_ox - 1 year ago
Quoted - randolf_mercer

A carry trade is when you leave a trade open overnight so that you can earn the difference in interest rates between the two currencies that make up the forex pair you are trading.

For example, in South Africa the Reserve Bank has set the Repo interest rate at 7.25% and in the USA the Federal Reserve interest rate is around 4.50%, so if you carry a USD/ZAR sell trade over till the next day, your broker will pay you an interest of (7.25% - 4.5%) = 2.75%

Let me add to what @randolf has said. If you do not carry a trade properly you won't earn any interest, in fact you will be debited for the interest rate differential instead.

Whether you earn overnight interest on a carry trade depends on if you are buying or selling the currency pair.

In @randolf's example, USD/ZAR interest rate is 4.5% vs 7.25% so to earn interest you must sell the USD/ZAR pair and leave the trade open overnight.

If you go ahead and buy USD/ZAR overnight, you will be debited instead because you are borrowing ZAR to buy USD, meaning you are borrowing ZAR with higher interest to buy USD with lower interest.

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