Created by Wei Bin Loo
Reviewed by Tibor Pál, PhD candidate and Steven Wooding
Based on research by
Craig Burnside, Martin Eichenbaum, Sergio Rebelo Carry Trade and Momentum in Currency Markets Annual Review of Financial Economics (December 2011)
Last updated: Aug 16, 2023

Our carry trade calculator will help you calculate the profit you can earn through executing the carry trade trading strategy. This calculator computes the profit due to the differential of the lending rate and the borrowing rate, and also the spot rate differential. You can check out our profit calculator to understand more about profitability.

Carry trade is a famous trading strategy within the foreign exchange field. This trading strategy involves borrowing the currency with a lower interest rate and investing the proceeds in a currency with a higher interest rate. The investor aims to earn a profit by exploiting the difference in interest rates.

For example, if Currency A has an interest rate of 1% and Currency B has an interest rate of 3%, the investor will borrow Currency A by paying the 1% interest rate and invest the money into Currency B to receive the 3% interest. Please check out our real interest rate calculator and interest rate calculator to understand more about this topic.

Don't worry if this still sounds confusing to you. Everything will be clear when we explain the carry trade calculation in the next section.

Now, let's look at the example below to understand how a carry trade works in practice after understanding the carry trade definition.

Assuming Company Alpha has executed the carry trade (long USD and short GBP) with the following information:

• Currency exchange: GBP / USD
• Initial exchange rate: 0.85
• Settle exchange rate: 0.83
• USD interest rate: 0.75%
• GBP interest rate: 0.5%
• Number of days until the trade is settled: 180 days
• Amount invested: $1,000 1. Determine the lending rate and borrowing rate. As USD has a higher interest rate, the carry trade will involve buying the USD and selling the GBP. Hence, the lending rate is the USD interest rate, and the borrowing rate is the GBP interest rate. Hence, the lending rate is 0.75% and the borrowing rate is 0.5%. 2. Calculate the spot rate differential. The spot rate differential can be calculated using the formula below: spot rate differential = (settle exchange rate − initial exchange rate) / initial exchange rate In our example, the spot rate differential is (0.83 − 0.85) / 0.85 = -2.35%. 3. Determine the number of days until the trade is settled. The days until trade settles is the number of days calculated from when the trade is initiated to the day when the trade is settled. The days until trade settles is 180 days. 4. Calculate the investment return The investment return can be calculated using the formula below: investment return = (1 + (lending rate − borrowing rate) × (1 + spot rate differential)) ^ (days / 360) − 1 The investment return for the carry trade is (1 + (0.75% - 0.5%) × (1 + (-2.35%))) ^ (180 / 360) − 1 = 0.122%. 5. Determine the amount invested The amount invested is the amount of money you have invested in executing the carry trade. The amount invested for our example is $1,000.

6. Calculate the carry trade profit

The last step is to calculate the carry trade profit using the formula below:

carry trade profit = amount invested × investment return

The carry profit will be $500. You can calculate this by using this formula: carry trade profit = amount invested × investment return ### How can I calculate the spot rate differential? You can calculate the spot rate differential in three steps: 1. Determine the initial exchange rate. 2. Estimate the settle exchange rate. 3. Compute the spot rate differential: spot rate differential = (settle exchange rate - initial exchange rate) / initial exchange rate Wei Bin Loo Spot rate differential Initial exchange rate Settle exchange rate Spot rate differential % Investment return Days until trade settles days Lending rate % Borrowing rate % Investment return % Carry trade profit Amount invested$
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