What is Carry Trade and How Does It Work?

What is Carry Trade?

Carry Trade is a strategy where an investor borrows in a low-interest-rate currency and invests in a high-interest-rate currency. The goal is to profit from the interest rate differential between the two currencies.

How Does It Work?

1. The investor borrows in a low-interest-rate currency (e.g., US Dollar).
2. The funds are converted into a high-interest-rate currency (e.g., Turkish Lira) and invested in interest-bearing instruments (e.g., bonds, deposits).
3. The investor earns profit from the interest rate difference (high interest – low interest = net gain).
   

USD – TRY Carry Trade Example (as of May 2025)

• Borrowing Cost (USD): Interest rates in the U.S. are around 2.00%.
• Investment Yield (TRY): Interest rates in Turkey are around 55.00%.
• Exchange Rate: 1 USD = 38.6783 TRY (as of May 19, 2025 – Source: ValutaFX)

Scenario:

• An investor borrows $100,000 USD.
• This is converted to 3,867,830 TRY.
• The entire amount is invested at 55% annual interest.
• Annual return: 3,867,830 TRY × 55% = 2,125,309 TRY.
• Borrowing cost: $100,000 × 2% = $2,000 USD (≈ 77,356 TRY).
• Net Profit: 2,125,309 TRY – 77,356 TRY = 2,047,953 TRY.

Note: This calculation does not account for exchange rate fluctuations or other market risks.

Advantages

• High Interest Differential: Potential for strong returns due to interest rate gaps.
• Use of Leverage: Enhances potential profits.
• Steady Passive Income: Interest income provides regular cash flow.
• Portfolio Diversification: Adds an alternative return stream to a portfolio.
  

Risks

• Exchange Rate Volatility: Sudden changes in exchange rates can erode profits.
• Interest Rate Changes: Central bank policies can shift yield opportunities.
• Leverage Risk: While leverage increases gains, it also magnifies losses.
• Market Volatility: Global economic or political events can disrupt strategies.

CONCLUSION : Carry Trade can be a profitable strategy under the right conditions. However, due to the high risks related to exchange rate fluctuations and interest rate shifts, it should be pursued only after thorough analysis and strong risk management.

IMPORTANT NOTE : It is said by experts in the sector that investors are allegedly assured by the related authority (in charge) that they won’t lose money due to currency rate change, when converting back to foreign currency. This is supposedly being managed through Central Bank interventions “to keep the USD/TRY rate stable” (as much as possible). In any case, it is a confirmed/known fact that the Central Bank has had to sell billions of dollars in the market, to prevent the dollar from sky-rocketing against TL, on several occasions.