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.
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.
Ask students to read the article on Colombia’s Interest-Rate Increases and find the words from the Vocabulary task in the article.
Where can I read about it?
Most Profitable Carry Trade Spurred by Colombia’s Interest-Rate Increases, Bloomberg
1 gauge, 2 resiliency, 3 derails, 4 spur, 5 gains, 6 rally, 7 risk-adjusted, 8 triggers, 9 hiking, 10 benchmark
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