Carry Trade Arbitrage
Definition
A financial strategy exploiting interest rate differentials: borrow at low rate (e.g., lease gold at 1%), sell into market, invest proceeds at high rate (e.g., US Treasuries at 10%), capturing the spread as profit. Becomes destabilizing when applied to central bank reserves, as it creates long-term liabilities (unreturned leased gold) and draws down physical reserves while creating paper IOUs.
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