Round here, students have to take out a loan to get them through 3 years of college. What if Mom and Pop have money to spare, so that their lil’ darling doesn’t actually need the loan? You still take it – because it’s a great example of an advantageous carry trade.

The student loan has to be repaid at something like 1.5% over 15 years – a very low rate.
But you can just put the money in any no-risk investment, yielding say 4% pa, and you can’t not make a profit on the deal.

A carry trade takes advantage of differences in interest rates – you see examples in various markets, stocks, forex, the principle is basically identical.

2 commodities attract 2 different rates of interest – let’s say JPY interest rate is 1.0%, while the Australian dollar AUD is 6.5%. If you make a trade to sell JPY/AUD, there’s a net difference of 5.5% in the 2 rates, and you are eligible to receive 5.5% on your holding over the year.

What if the pair ends up exactly the same price at the end of the year?
The carry trade has a basic profit of 5.5% x $1,000 = + $55 before you consider anything else.

Now – obviously you have to take into account any movement in the price of the pair at the end of the period – if the price has gone up/down he gains/loses (depending on whether he’s long or short). But this is still added to/subtracted from the basic profit of the carry trade – you’re not starting from zero.

Let’s factor in leverage
This is where it starts making real sense in the forex market – you’re putting $1,000 into the pot, which by leverage of 100:1, comes to $100,000

5.5% x $1,000 x 100 = + $5,500

Which is good money – a 55% ROI over the year.

Next, comes 18. Time Frames →