Carry Trade Calculator

At its core, a carry trade evaluates the spread between a funding currency rate and an investment currency rate, adjusted for expected exchange rate movements over a specific timeframe. The calculation relies on three main mathematical steps:

1. Spot Rate Differential (srDiff): Measures the percentage change between the initial exchange rate (iniEx) and the ending exchange rate (endEx) using the formula srDiff = (endEx - iniEx) / iniEx.

2. Investment Return (inv_return): Combines the net interest rate spread (lendRate - borrowRate), adjusts it for the spot rate differential, and compounds it over the investment duration: inv_return = (1 + (lendRate - borrowRate) * (1 + srDiff)) ^ (days/360) - 1.

3. Carry Trade Profit (ct_profit): Applies the annualized and duration-adjusted return percentage to your initial principal: ct_profit = inv_return * amt_invest.

Imagine you execute a carry trade with an initial investment principal of $100,000 (amt_invest). You borrow funds at a low annual rate of 2.0% (borrowRate) and invest in an asset yielding 7.0% annually (lendRate). The trade is held for 180 days (days). At the start of the trade, the exchange rate (iniEx) is 1.50, and at the end of the trade (endEx), it shifts slightly to 1.48 due to currency appreciation or depreciation.

Step 1: Calculate the spot rate differential. srDiff = (1.48 - 1.50) / 1.50 = -0.0133 (a 1.33% drop in the exchange rate).

Step 2: Calculate the net investment return over 180 days. Net interest spread is 7.0% - 2.0% = 5.0%. Factoring in the spot rate differential, we evaluate inv_return = (1 + 0.05 * (1 - 0.0133))^(180/360) - 1, which results in approximately 2.45%.

Step 3: Multiply the return by your initial capital. ct_profit = 0.0245 * $100,000 = $2,450. Your net profit after 180 days is $2,450.

1. Monitor Currency Volatility: Even a favorable interest rate spread can be entirely wiped out by a sharp adverse movement in the spot exchange rate. Always factor potential currency depreciation into your risk management framework.

2. Account for Transaction Costs: Broker commissions, swap rates, and overnight financing fees eat into net margins. Ensure your projected carry trade profit exceeds these hidden friction costs.