Carry trades are often used in the foreign exchange market, where investors can borrow in a currency with a low interest rate and use the funds to buy a currency with a higher interest rate. For example, an investor might borrow Japanese yen, which has a low interest rate, and use the funds to buy Australian dollars, which have a higher interest rate. If the Australian dollar appreciates against the Japanese yen, the investor can profit from the difference between the two interest rates, in addition to the appreciation of the asset.

Carry trades can be risky, as they rely on the assumption that exchange rates and interest rates will remain stable. If these rates change unexpectedly, the carry trade can result in losses for the investor. Carry trades can also contribute to instability in financial markets, as large-scale carry trades can lead to significant capital flows between countries and potentially create imbalances in asset prices.