Carry Trade

A trade where money is borrowed at a low interest rate or yield to finance the purchase of a security or instrument with a higher one. For example, until the credit crisis took hold in 2008 the carry trade was very popular on foreign exchange markets. Investors borrowed funds in a low yielding currency, usually the yen or the Swiss franc, and invested in high yielding currencies such as sterling or the Australian or New Zealand dollar. During the crisis, its popularity waned when market volatility soared, turmoil in the banking system led to widespread risk aversion and the general decline in official interest rates caused by the global recession narrowed the gap between low and high yielding currencies.