Negative Carry Pair

DEFINITION of 'Negative Carry Pair'

A forex trading strategy in which a long position is held on a low-interest currency and a short position is held on a high-interest currency. A negative carry pair is the inverse of a positive carry. Because there is a cost with maintaining the long position until the expiration of the position, it is considered "negative". A negative carry implies that the futures price is higher than the current spot price of the underlying asset.

BREAKING DOWN 'Negative Carry Pair'

For countries with high short-term rates, the cost of the negative carry on a low-yielding reserve can be serious. For example, a long USD/EGP position when annual interest rates in Egypt are 8.5% and interest rates in the U.S. are 1% will cost 7.5% a year in carry. The investor can either abandon the option and forgo potential future returns created by interest rate volatility, or sell EGP and incur the cost of borrowing the currency at 8.5% and lending U.S. dollars at 1%.

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