What is a 'Positive Carry'

Positive carry is a strategy of holding two offsetting positions and profiting from a price difference. The first position generates an incoming cash flow that is greater than the obligations of the second.

BREAKING DOWN 'Positive Carry'

Similar to arbitrage, positive carries often occur in the currency markets, where interest that investors receive in one currency is more than they have to pay to borrow in another currency.

A more specific example of a positive carry would be borrowing $1000 from the bank at 5% and investing it into a bond paying 6%. Thus, the coupon on the bond would pay more than the interest owing on the loan to the bank, and you pocket the 1% difference.

Positive Carry and Arbitrage

While positive carry can result from differences in valuation, based on the underlying stability or instability of a security’s cash flows, arbitrage exists as a result of market inefficiencies. For example, Company A might trade at $30 on the New York Stock Exchange (NYSE) but $29.95 but on the London Stock Exchange (LSE) simultaneously. A trader can purchase the stock on the LSE and immediately sell the same shares on the NYSE, earning a profit of 5 cents per share.

Advanced technologies such as high frequency and computerized trading has made it for more challenging to profit from such pricing errors in the market. Any fluctuations in similar financial instruments will be quickly caught and corrected.

Positive Carry and the Federal Open Market Committee (FOMC)

Trades involving positive carry are heavily reliant on the policies of the Federal Open Market Committee (or FOMC). The federal open market committee is the branch of the U.S. Federal Reserve Board that determines the nation’s monetary policy, including buying or selling U.S. government securities on the open market. These decisions affect interest rates on securities worldwide.

For example, to tighten the money supply in the United States and decrease the amount available in the banking system, the Fed will decide to sell government securities. Any securities the FOMC purchases will be held in the Fed's System Open Market Account (SOMA). The Federal Reserve Act of 1913 and Monetary Control Act of 1980 granted the FOMC permission to hold these securities until maturity or sell them when they see fit. The Federal Reserve Bank of New York executes all of the Fed's open market transactions.

Wall Street scrutinizes the 8 (secret) annual meetings of the FOMC to figure out if the committee is about to embark on several tightenings, will remain on hold and not change interest rates, or raise rates to slow inflation.

RELATED TERMS
  1. Federal Open Market Committee (FOMC)

    The Federal Open Market Committee (FOMC) is the branch of the ...
  2. Federal Open Market Committee Meeting ...

    The Federal Open Market Committee (FOMC) meeting occurs eight ...
  3. Target Rate

    Target rate is the interest rate charged by one depository institution ...
  4. Open Mouth Operations

    Open mouth operations are speculative statements made by the ...
  5. Forex Arbitrage

    Forex arbitrage is the simultaneous purchase and sale of currency ...
  6. Currency Arbitrage

    Currency arbitrage is the act of buying and selling currencies ...
Related Articles
  1. Insights

    Why the Fed Keeps Lowering Macro Growth Outlook

    Examine the FOMC's communications to determine when and why it has reduced its growth expectations. Find out how changing forecasts impact interest rate hikes.
  2. Investing

    Fed Could Drive Stocks Higher: Morgan Analysts

    The Federal Open Market Committee gets underway today, and analysts say a stock rally could follow.
  3. Financial Advisor

    What to Expect at April's FOMC Meeting

    The Fed won't raise rates Wednesday, but it's worth paying close attention to Yellen's comments about the future trajectory of rates.
  4. Insights

    As Expected, FOMC Leaves Rates Unchanged

    The FOMC left rates unchanged at its latest meeting, sees "improved" sentiment.
  5. Trading

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  6. Financial Advisor

    Will the Federal Reserve Hike Rates in April?

    Here's a look at what the Federal Reserve will or won't do in April and why.
  7. Investing

    Markets Await Federal Reserve (SPY, VTI)

    Stocks opened flat on Wednesday before the Federal Reserve’s release of the minutes from its September meeting.
  8. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  9. Insights

    Yellen Won't 'Completely Rule Out' Negative Rates

    Since the European Central Bank's adoption of the policy in June 2014, and particularly following Japan's move into negative rates in January, American investors have feared that the Fed could ...
RELATED FAQS
  1. What is the relationship between inflation and interest rates?

    As interest rates are lowered, more people are able to borrow more money, causing the economy to grow and inflation to increase. ... Read Answer >>
  2. How do I use software to make arbitrage trades?

    Understand the meaning of arbitrage trading, and find out how traders leverage software programs to detect arbitrage trade ... Read Answer >>
  3. How are interest rates related to open market operations?

    Learn about open market operations and how this monetary policy tool impacts interest rates. Find out how the Fed combats ... Read Answer >>
Trading Center