Carry Trade Calculator

Understanding Forex Carry Trade Strategies

A carry trade is a popular financial strategy in foreign exchange (forex) markets where an investor borrows capital in a low-interest-rate currency (the funding currency) and uses those funds to purchase or deposit assets in a high-interest-rate currency (the target currency).

How Carry Trade Profit is Calculated

The total return of a carry trade consists of two key components: the net interest rate spread (carry yield) and the capital gain or loss resulting from fluctuations in the spot exchange rate.

Mathematical Formula for Carry Trade Profit

Net interest income $I_{\text{net}}$ over holding time $t$ (in years) for principal $P$:

$$I_{\text{net}} = P \times (r_{\text{target}} - r_{\text{funding}}) \times t$$

Exchange rate impact $\Delta FX$:

$$\Delta FX = P \times \left( \frac{E_{\text{settle}} - E_{\text{initial}}}{E_{\text{initial}}} \right)$$

Total profit $R_{\text{total}} = I_{\text{net}} + \Delta FX$.