UAE First Gulf Exchange (FGX) Practice Exam - Prep, Study Guide & Practice Test

The 'carry trade' strategy in forex involves borrowing funds in a low-interest currency and investing them in a higher-interest currency. This strategy capitalizes on the difference in interest rates between two currencies. By borrowing at a lower interest rate, a trader can use that capital to invest in a currency that offers a higher yield, thus earning a profit from the interest rate differential. The effectiveness of this strategy relies on the stability of both the currencies involved and the overall market conditions.

In this context, the focus is on the potential earnings from interest rate differentials while also being aware of potential risks, such as currency fluctuations and economic events that may affect interest rates. This makes the carry trade an alluring option for traders looking to enhance returns on their investments in the forex market.