Carry Trade Calculator
Calculate the interest income from a leveraged currency carry trade based on the rate differential between two currencies and the holding period. Ideal for forex traders evaluating whether the yield advantage outweighs exchange-rate risk.
About this calculator
A currency carry trade borrows in a low-interest-rate currency (the base) and invests in a high-interest-rate currency (the target), profiting from the interest rate differential. The carry return formula used here is: Carry Profit = investmentAmount × leverage × ((targetCurrencyRate − baseCurrencyRate) / 100) × (holdingPeriod / 365). The leverage multiplier scales the notional exposure beyond the initial capital; the rate differential term converts the annualised percentage gap into a decimal; and dividing the holding period by 365 prorates the annual yield to the actual days held. This formula isolates the pure interest carry component and excludes any exchange-rate gain or loss, which must be evaluated separately. A positive result means the trade earns a net yield; a negative result indicates a negative carry that must be offset by a favourable currency move.
How to use
Assume you invest $10,000 with 5× leverage, borrowing in a currency at 1% and investing in one at 6%, held for 90 days. 1. Rate differential: 6% − 1% = 5% → 0.05 2. Leveraged notional: $10,000 × 5 = $50,000 (embedded in formula) 3. Time proration: 90 / 365 = 0.2466 4. Carry Profit = 10,000 × 5 × 0.05 × 0.2466 ≈ $616.44 Your gross carry income over 90 days is approximately $616. Remember to subtract financing costs and account for potential exchange-rate losses before treating this as net profit.
Frequently asked questions
What are the main risks of a currency carry trade strategy?
The biggest risk is an adverse exchange-rate move that wipes out — or exceeds — the interest income. If the target (high-yield) currency depreciates against the base currency, the capital loss can far outstrip the carry gain, especially with leverage. Sudden risk-off events like financial crises tend to cause sharp carry-trade unwinds, producing rapid losses. Additionally, widening bid-ask spreads and rollover costs can erode the apparent yield differential. Traders should always model the break-even exchange-rate move before entering a carry position.
How does leverage amplify both gains and losses in carry trading?
Leverage allows you to control a notional position larger than your actual capital. A 5× leverage ratio means every 1% gain in carry yield translates into 5% return on invested capital — but the same multiplication applies to losses. For example, a 2% adverse currency move on a 5× leveraged trade results in a 10% capital loss. Regulators in many jurisdictions cap retail forex leverage for this reason. Carry traders must ensure that margin requirements are met at all times to avoid forced liquidation during volatile periods.
When is a currency carry trade most likely to be profitable?
Carry trades perform best in low-volatility, risk-on market environments where investors are comfortable seeking yield. Stable or appreciating target currencies amplify returns by adding a capital gain on top of the interest differential. Prolonged periods of central-bank divergence — where one country raises rates while another holds or cuts — widen the differential and make the strategy more attractive. Conversely, carry trades are most dangerous during global stress events, as high-yield currencies tend to sell off sharply when investors flee to safe-haven assets like the US dollar or Japanese yen.