Using leverage with the carry trade
Forex markets can offer relatively higher leverage than trading in other assets; this can have an amplifying effect on potential profits from the carry trade. Carry trading major pairs like EUR/USD with margin requirements of 2-5% could turn modest interest rate differentials into substantial potential returns by multiplying the carry profit 20-50 times; however, leverage can also magnify profits and losses from price action of the forex pair that could result in losses exceeding the account’s initial deposit.
Using the above example, buying 1 lot of AUD/JPY (100,000 AUD) with a 5% margin requirement at price 91.200 would require ¥456,000, or about $3,350 USD, result in a ¥9,120,000 position, or about $67,000, and produce a daily profit of ¥1,000, or about $7.35.* This example trade would reflect a 0.2% daily return if all variables remained equal.
