What is a carry trade?
Borrowing cheaply to buy high-yielding assets is popular, but risky
IF THERE IS one iron law of finance, it is that any scheme which appears to generate big, reliable profits is hiding some correspondingly big risks. History is packed with examples of such money-spinners becoming wildly popular, only for devotees to belatedly realise that they can generate sudden losses as well as steady gains. Should that force lots of people to abandon similar trades at once, the knock-on effects can threaten all sorts of other assets, or even the financial system itself. Think of the enormous bets on subprime mortgages that preceded the global financial crisis of 2007-09. The latest example is the Japanese yen “carry trade”, the unwinding of which has been roiling markets since mid-July while rapidly increasing the value of the yen. What is a carry trade, and how can it unravel so violently?
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