Carry Trade

Today Greenspan said that the Carry Trade has limited room to run.

What is a Carry Trade?

The investors borrow in Japan where the interest rate is low (almost 0) and invest in high yield regions such as US – This is also called Interest rate arbitrage. As the Yen rises, the investors/traders head to unwind the position. In 1998 similar situation arose when Russia defaulted on the debt and the implosion of LTM. The yen surged 20% in less that 2 months.