It is a strategy in which an investor sells a certain contract, be it stocks, currency or commodity, at a relatively low interest rate and uses the funds to purchase a different produce yielding a higher interest rate.

A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

For example, a trader borrows Rs 1,000 from an Indian bank and converts the funds into dollars and buys a bond for the equivalent amount.

Given the fact that the bond pays 4.5 per cent and the Indian interest rate is set at zero per cent. The trader stands to make a profit of 4.5 per cent as long as the exchange rate between the countries does not change.

However, carry trade has its own risks. The big risk is the uncertainty of rates. A small movement in rates can result in huge losses unless the position is hedged appropriately.

In the commodity realm, the convenience yield — the benefit of holding the underlying physical good – is a predictor of future spot prices in a host of commodities (eg, oil).

Carrying Broker A member of a commodity exchange who provides clearing services for other members or brokers.

A carrying broker does this in addition to his/her other duties as a member of the exchange in return for a fee.

The benefits of using a carrying broker include cost efficiencies, economies of scale and risk mitigation. The broker also provides additional services such as maintaining records of client transactions and preparing and distributing client statements and confirmations.

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