What it is

At its simplest, the carry trade is the practice of borrowing in a currency with low interest rates and investing in assets denominated in another currency where rates are higher.

In global markets, this often means borrowing in dollars, yen, or euros — currencies that are stable and cheap — and deploying that capital into economies like Brazil, Egypt, or Turkey, where yields are much higher.

Two sides define every carry trade

• The Borrow Side: Where money is cheap — typically in developed markets like the U.S. or Japan. Borrowers can access capital at low rates because liquidity is abundant and credit risk is minimal.

• The Invest Side: Where capital is productive — often in emerging economies that offer higher interest rates to attract foreign investment. These markets reward investors for taking on inflation and currency risk.

The difference between those two rates, adjusted for currency movement and hedging costs, is known as the carry. It’s the real-world yield spread between cheap capital and productive capital — or simply, where dollars work harder.

---

An Example in Practice

Imagine a global fund borrows $100 million at 5% in the U.S. and invests it into short-term Egyptian sovereign debt yielding 25%. After paying for a currency hedge (say, 5%) and other costs, the fund earns roughly 15% net yield — not from speculation, but from the natural difference in global interest rates.

This is the essence of the carry trade:

Earning yield from the world’s structural imbalances in the cost of capital.

It’s not an exotic trade — it’s how global capital naturally seeks efficiency.

---

In Institutional Finance

The carry trade underpins much of global macro investing. It’s executed through:

• FX forwards and swaps, used to hedge currency exposure.

• Sovereign bonds, especially short-term instruments in high-yield countries.

• Credit derivatives, allowing funds to synthetically gain exposure to interest rate differentials.

But these trades are usually limited to institutions with:

• Access to primary dealers and liquidity networks.

• Large-scale capital (often $1–10 million minimum).

• The expertise to manage FX and credit risk.

Until now, this mechanism — the world’s oldest yield engine — has been closed off from ordinary investors and onchain participants.

Hamilton changes that.