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Carry trade: Difference between revisions
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:—Riff Clichard, ''Carry'' (1982, needless to say, a time of usurious interest rates)}} | :—Riff Clichard, ''Carry'' (1982, needless to say, a time of usurious interest rates)}} | ||
A transaction where one takes advantage of the futures market. “[[Positive carry]]” describes the state of affairs when the expected return on an asset is greater than the cost of owning it — being the implied cost of financing it, as well as actual costs of [[Custody|holding]] and | A transaction where one takes advantage of the futures market. “[[Positive carry]]” describes the state of affairs when the expected return on an asset is greater than the cost of owning it — being the implied cost of financing it, as well as actual costs of [[Custody|holding]] it and ensuring — ''in''suring — you don’t lose it. This means you can do a carry trade: borrow money to buy the asset and arrange to sell it forward later, and pay down your loan. | ||
If you can see that the spot price of an asset today is lower than its forward price (as implied by the futures price) — that is, the forward curve is in “[[contango]]” — by an amount greater than your [[cost of funding]], then all you have to do to make money is | If you can see that the spot price of an asset today is lower than its forward price (as implied by the futures price) — that is, the forward curve is in “[[contango]]” — by an amount greater than your [[cost of funding]], then all you have to do to make money is | ||