A carry trade is a strategy where an investor borrows money in a currency with a low <a href="/NewSite/encyclopedia/interest-rate/" class="ency-link">interest rate</a> and uses the proceeds to purchase assets denominated in a currency offering a higher yield. The profit comes from the <strong>interest‑rate differential</strong>, adjusted for any change in the exchange rate between the two currencies. Although conceptually simple, the strategy requires careful monitoring of funding costs, <a href="/NewSite/encyclopedia/swap/" class="ency-link">swap</a> rates, and market sentiment.

<h2>How It Works</h2>
<p>First, the trader selects a funding currency, typically one with near‑zero policy rates such as the Japanese yen or Swiss franc.</p>
<p>Next, the borrowed funds are converted into the target currency, for example the Australian dollar, New Zealand dollar, or an emerging‑market currency.</p>
<p>The proceeds are then invested in high‑yieldyield