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. Target Rate

    Target rate is the interest rate charged by one depository institution ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository ...
  4. Forex Arbitrage

    Forex arbitrage is the simultaneous purchase and sale of currency ...
  5. Fixed-Income Arbitrage

    Fixed income arbitrage is an investment strategy that realizes ...
  6. Statistical Arbitrage

    Statistical arbitrage is a profit situation arising from pricing ...
Related Articles
  1. Insights

    How Federal Open Market Committee Meetings Drive Rates And Stocks

    Janet Yellen's first Federal Open Market Committee (FOMC) meeting - and its aftermath - is an important bellwether for the immediate future of the U.S. economy.
  2. 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.
  3. Insights

    What are the Federal Reserve Chairman's responsibilities?

    Learn about the duties and responsibilities of the chairman of the Federal Reserve Board, including testifying before Congress and as acting as chair of the FOMC.
  4. Trading

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  5. Investing

    How To Arbitrage Precious Metals

    Here are the fine points, trading tips, suitable securities, and examples relevant to precious metals arbitrage trading.
  6. Investing

    How The Fed May Kill The 2018 Stock Rally

    Hawk Attack: A more hawkish Fed may spell trouble for stocks
  7. 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.
RELATED FAQS
  1. What are the implications of a low federal funds rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
  2. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ... Read Answer >>
  3. Who determines interest rates?

    Learn who determines interest rates. In countries using a centralized banking model, interest rates are determined by the ... Read Answer >>
  4. What is arbitrage?

    Arbitrage is buying a security in one market and simultaneously selling it in another at a higher price, profiting from the ... Read Answer >>
  5. 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 >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center