What is it?

Carry trade is a method of investing in which an investor borrows money at a low interest rate to buy an investment that is likely to produce a much higher amount of profit. Carry trades are often used by investors in foreign currencies. For example, an investor borrows money in a currency with a lower interest rate and then uses the money to make a deposit in an account in another currency which pays out higher interest. The risk in these transactions occurs when the exchange rate changes and the money invested is no longer worth as much as it had been.

Why is it in the news?

With exchange rates showing a fair amount of volatility, investors find that betting on the rates going up or down can be very lucrative. Currencies can be bought at a low interest rate and then converted into a currency which pays the investor a high interest rate or is lent to borrowers in order to earn interest on it when they repay the loan. The most common currency for carry trading was the yen as traders tried to earn money off the low interest rates. At the moment, the dollar, pound and euro are also proving to be interesting to investors. The risk of the investment lies in the fluctuations of the currency market.

How can I use it in class?

Write the words € 1bn on the board and ask students how to write this out in numbers: (€ 1,000,000,000). Explain that an investor borrows 1 billion euros at an interest rate of 2%. The investor pays € 1,020,000,000 for the loan or 1 billion as the principal plus 20 million Euros for interest. The investor then puts the money into an account which pays 4% interest. Ask the students how much the investor will earn? (€ 40,000,000 or 40 million Euros). The investor repays the 1 billion 20 million euros and has made a profit of 20 million Euros.

Vocabulary

Complete the sentences below with the words in the box.

1 A __________ is a type of tool used for measuring something such as economic growth or GDP of a country.
2 When a currency shows __________ in terms of growth, it means that it can quickly return to being strong after temporarily suffering a set back.
3 When someone __________ something, they stop it from succeeding by working against it.
4 When internal or external forces encourage an activity to develop or to happen faster, we can say that they __________ its growth.
5 Investors who make use of carry trade bet on __________ or increases in a particular currency and stability or decreases in another.
6 When share prices suddenly increase after a slow period, this is called a __________.
7 An investment which is __________ means that it is calculated in a way that takes account of the risk involved.
8 If a factor or event initiates an action, we can say that it _________ it or starts it.
9 When we talk about a central bank __________ interest rates it means that it is raising them.
10 A __________ is a level of quality to use as a standard when comparing things.

Reading

Ask students to read the article on Colombia’s Interest-Rate Increases and find the words from the Vocabulary task in the article.

Discussion questions

• Carry trade has become less popular lately. Do you think this is a good or bad development?
• In general, what is your opinion of ‘betting’ on currency rates?
• Do you think that investors who can afford to deal in currencies have an effect on their value?
• Why is the exchange rate a risk factor for carry trade investors?
• Why does the article say that the peso is a good currency for carry trade investors?

Where can I read about it?

Most Profitable Carry Trade Spurred by Colombia’s Interest-Rate Increases, Bloomberg
South African Central Bank Keeps Rates Steady, Rand Maintains Gains, Top Forex News
And for more information:
CBN Carry Trade Index Introduction, Central Bank News

Key

1 gauge, 2 resiliency, 3 derails, 4 spur, 5 gains, 6 rally, 7 risk-adjusted, 8 triggers, 9 hiking, 10 benchmark