Carry Trade
캐리 트레이드
A financial trading strategy that borrows in a low-interest-rate currency and invests in assets denominated in a high-interest-rate currency to profit from the interest rate spread. The investor earns the differential between cheap borrowing costs and higher yields, but faces the risk that adverse exchange rate movements, specifically, appreciation of the borrowed currency, can wipe out returns or trigger large losses. The Japanese yen has been the quintessential funding currency since the 1990s; when the interest rate gap between South Korea and the United States inverts, the won finds itself on the 'sold' side of carry trades, facing structural depreciation pressure.
Sources
- Wikipedia (EN) definition, mechanism, currency carry trade structure, risks including exchange rate reversal and the 2008 unwind
- Wikipedia (KO) Korean-language definition of carry trade (차입 거래/캐리 거래), positive/negative carry distinction, yen carry trade as representative example
- bis.org BIS Quarterly Review (September 2007): 'Evidence of carry trade activity' confirms the concept as a significant focus of central bank financial stability monitoring, with interest rate differentials driving exchange rate movements