Groundlearn / Glossary / Carry trade
Carry trade
A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
Borrowing in a low interest rate currency to invest in a high interest rate one, profiting if the exchange rate does not move against you.
The exam angle
Returns are negatively skewed: long stretches of small gains punctuated by sharp unwinds. A textbook case of a strategy whose Sharpe ratio flatters it.
Where it appears in the syllabus
- EconomicsCFA Level II · exam weight 5–10% · Two dense modules: currency equilibrium value and economic growth.
- Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.
Related terms
- Currency hedgingUsing forwards, futures or options to reduce a portfolio’s exposure to exchange rate movements on foreign assets.
- Interest rate parityThe condition that the forward exchange rate differs from the spot rate by exactly the interest rate differential, so…
- Purchasing power parityThe proposition that exchange rates adjust so that identical goods cost the same across countries.
- BacktestingComparing realised losses with the VaR forecasts that preceded them, to check that breaches occur about as often as…
- Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.
- Coherent risk measureA risk measure satisfying monotonicity, subadditivity, positive homogeneity and translation invariance.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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