The purpose of this paper is to examine how vulnerable Korean foreign exchange market is to carry trade. The major findings of this paper are as follows. First, carry trade incentive, defined by risk-adjusted interest rate differential between Korea and the US, significantly affects both won/ dollar exchange rate and FX liquidity condition in Korea. Second, global liquidity risk, measured by US dollar LIBOR-OIS spread, also exerts significant influence, albeit to the lesser extent to carry trade incentive, on both won/dollar exchange rate and FX liquidity condition in Korea. These findings suggest that the Korean won may depreciate sharply and the Korean FX liquidity condition may deteriorate greatly in response to the unwinding of global carry trade.