An investment strategy whereby the investor borrows from a relatively low-yielding or low-interest currency, and invest in high-yielding or high-interest currency.

The idea behind carry trade is to buy an instrument that offers high interest rates or yields using a currency who’s central bank set a low interest rate. This is essentially like borrowing money at a low interest rate in order to purchase a money that yields a higher interest. Then, by holding the position, the trader theoretically can gain from the interest rate spread.

The inherent risk in carry trade is the exchange rate risk. If the exchange rate changes adversely (the higher interest currency declines relative to the low one), the gain from the interest or yield spread may be reduced, wiped out, or turned into a loss.