Strategies · Library · Currencies
§8.2Carry
Carry trade
Currencies with high interest rates have tended to hold or gain value rather than fall as theory says. Buy forwards on high-yield currencies and sell them on low-yield ones; hedged versions are risk-free but rarely pay.
- Asset class
- Currencies
- Held for
- Months
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Forward rate versus spot, which reflects the interest differential.
- Entry and exit
- Hold until the forward matures, then roll.
- Sizing
- One currency at a time.
How it fails
- Sudden currency reversals
- Crash risk in risk-off markets
- Funding cost
Data it needs
- interest rates
- spot rates
- forward rates
FX spot closes exist; rates and forwards do not.
How ARCANE uses it
Could cite rate differentials in a Call on a pair, with figures from sourced data.
Needs rate data and a borrow side.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §8.2, p. 87 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.