A carry trade is a foreign exchange strategy in which an investor borrows money in a currency with a low-interest rate and invests it in a currency with a higher interest rate, profiting from the difference in rates. The strategy relies on the assumption that the higher-yielding currency will maintain its value or appreciate against the funding currency, allowing the trader to benefit from both the interest rate differential and potential currency appreciation. However, carry trades can be risky, as exchange rate fluctuations and geopolitical events can lead to significant losses.