Carry trading

In forex there are swaps or interest rates for each pair. For example aud/jpy is 1.1 pip for long position and -1.17 for short position for that pair. So you can have additional money just for carry that position for few days.

For instance, the primary interest rates in Great Britain are much higher than in Japan, so if a trader buys GBP, he/she will earn interest at 5 PM EST. on the other hand, if he/she sells GBP in this currency pair, he/she will pay interest at 5 PM EST.

It's like free money, right? Well, not quite. The big risk is the uncertainty of exchange rates. Remember, you've still got to pay back the money in a foreign currency. If your domestic currency falls in value relative to the currency you borrowed, then you run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

An example of a "yen carry trade" is borrowing 1,000 yen from a Japanese bank, exchanging the funds into U.S. dollars and buying a bond for the equivalent amount. Assuming that the bond pays more than the amount you must pay the bank for borrowing the funds, and the exchange rate does not move adversely, you will earn a profit.