Commercial banking can be viewed as a fixed-income carry trade because banks typically engage in maturity transformation, where they borrow short-term and lend long-term.
* Short-term floating-rate deposits:
* Banks often attract deposits with short-term maturities and floating interest rates.
* These deposits are generally considered stable and low-cost sources of funds.
* Long-term fixed-rate loans:
* Banks use these short-term deposits to fund long-term loans, such as mortgages or business loans, which typically have fixed interest rates.
* This creates a mismatch between the interest rates and maturities of assets and liabilities.
* Carry trade analogy:
* The bank earns the spread between the interest it pays on short-term deposits and the interest it earns on long-term loans.
* This process is similar to a carry trade, where profits are derived from the difference between borrowing costs and investment returns.
Thus, commercial banking inherently involves aspects of a carry trade through the practice of borrowing short-term to lend long-term.
ReferencesSource: How Finance Works

When the cost of gold is $1,100 per bullion and the 3-month forward contract trades at $900, the price difference indicates an arbitrage opportunity. The trader can capitalize on this by:
* Short-Selling Physical Gold: The trader borrows gold and sells it at the current market price of $1,100 per bullion.
* Long Position in Futures Contract: Simultaneously, the trader takes a long position in the futures contract at $900, agreeing to buy gold at this lower price in three months.
At the end of the 3-month period, the trader fulfills the futures contract by purchasing gold at $900 and delivers it to settle the short position, securing a profit from the price differential.