💱 Carry Trade Calculator
Calculate profits from currency carry trades
How to Use This Calculator
Enter Investment Amount
Input the amount you plan to borrow and invest in the carry trade.
Select Borrow Currency and Rate
Choose the currency you'll borrow in and enter the interest rate (typically a low-interest currency like JPY or USD).
Select Invest Currency and Rate
Choose the currency you'll invest in and enter the interest rate (typically a high-interest currency).
Enter Exchange Rate and Period
Input the exchange rate (borrow currency per invest currency) and the investment period in years.
Review Results
See your net profit, interest earned, interest paid, and carry spread to evaluate the trade opportunity.
Formula
Interest Earned = Investment Amount × Exchange Rate × Invest Rate × Period
Interest Paid = Investment Amount × Borrow Rate × Period
Net Profit = (Investment + Interest Earned) / Exchange Rate - Investment - Interest Paid
Carry Spread = Invest Rate - Borrow Rate
Example 1: USD to EUR Carry Trade
Investment Amount: $10,000
Borrow Rate (USD): 1.5%
Invest Rate (EUR): 4.5%
Exchange Rate: 1.10 (USD/EUR)
Period: 1 year
Foreign Amount: $10,000 × 1.10 = €11,000
Interest Earned: €11,000 × 0.045 × 1 = €495
Interest Paid: $10,000 × 0.015 × 1 = $150
Total Foreign: €11,495
Total Base: €11,495 / 1.10 = $10,450
Net Profit: $10,450 - $10,000 - $150 = $300
Example 2: JPY to AUD Carry Trade
Investment Amount: ¥1,000,000
Borrow Rate (JPY): 0.1%
Invest Rate (AUD): 3.5%
Exchange Rate: 0.0095 (JPY/AUD)
Carry Spread: 3.5% - 0.1% = 3.4%
This shows the potential profit from the interest rate differential
About Carry Trade Calculator
The Carry Trade Calculator is a financial tool that helps investors calculate the potential profits from currency carry trades. A carry trade is an investment strategy where an investor borrows money in a currency with a low interest rate and invests it in a currency with a higher interest rate, profiting from the interest rate differential (the "carry spread").
Carry trades are popular in forex markets, where traders take advantage of interest rate differences between currencies. The strategy works best when exchange rates remain stable or move favorably, as currency fluctuations can significantly impact profits or create losses that exceed the interest rate gain.
This calculator helps you understand the mechanics of carry trades, evaluate potential profits, and assess the risks involved. It's essential for forex traders, currency investors, and anyone interested in understanding international finance and currency markets.
When to Use This Calculator
- Forex Trading: Evaluate potential carry trade opportunities in currency markets
- Investment Analysis: Assess the profitability of borrowing in low-interest currencies
- Risk Assessment: Understand the potential returns and risks of carry trades
- Currency Strategy: Compare different carry trade scenarios and currency pairs
- Educational Purposes: Learn how carry trades work and calculate interest rate differentials
- Portfolio Planning: Incorporate carry trades into a diversified investment strategy
Why Use Our Calculator?
- ✅ Accurate Calculations: Precise formulas for interest and exchange rate conversions
- ✅ Comprehensive: Shows interest earned, interest paid, and net profit
- ✅ Easy to Use: Simple interface for quick calculations
- ✅ Educational: Helps understand carry trade mechanics
- ✅ Free Tool: No registration or fees required
- ✅ Flexible: Works with any currency pair and time period
Understanding Carry Trades
Carry trades work on the principle of interest rate arbitrage. When you borrow in a low-interest currency (like Japanese Yen with near-zero rates) and invest in a high-interest currency (like Australian Dollar with higher rates), you profit from the difference. The profit comes from the "carry spread" - the difference between the interest rates.
However, carry trades carry significant risks. Exchange rate movements can wipe out profits or create losses. If the currency you borrowed in appreciates relative to the currency you invested in, you'll lose money when converting back, potentially losing more than the interest rate gain. This is known as "carry trade unwind" and can cause rapid currency movements.
Real-World Applications
Classic JPY Carry Trade: Borrowing Japanese Yen at 0.1% interest and investing in Australian Dollar at 3.5% creates a 3.4% carry spread. With $100,000, you could earn $3,400 per year in interest, but exchange rate changes could eliminate or exceed this profit.
USD to Emerging Markets: Borrowing USD at 2% and investing in Brazilian Real at 8% creates a 6% carry spread, but emerging market currencies are more volatile and risky.
Hedge Fund Strategy: Many hedge funds use carry trades as part of their currency strategies, borrowing in stable, low-interest currencies and investing in higher-yielding markets.
Important Risks and Considerations
- Exchange rate movements can eliminate or exceed interest rate gains
- Carry trades work best in stable or favorable exchange rate environments
- Sudden currency movements can cause significant losses
- Leverage amplifies both gains and losses in carry trades
- Central bank policy changes can affect interest rates and exchange rates
- Consider transaction costs, spreads, and other fees when evaluating trades
Frequently Asked Questions
What is a carry trade?
A carry trade is an investment strategy where you borrow money in a currency with a low interest rate and invest it in a currency with a higher interest rate, profiting from the interest rate differential (carry spread).
What is the carry spread?
The carry spread is the difference between the interest rate you earn on your investment and the interest rate you pay on your borrowing. A positive carry spread means you profit from the interest rate differential, but exchange rate changes can affect actual returns.
What are the risks of carry trades?
The main risk is exchange rate movement. If the currency you borrowed in appreciates relative to the currency you invested in, you'll lose money when converting back, potentially losing more than the interest rate gain. This is why carry trades are considered risky, especially in volatile markets.
Which currencies are best for carry trades?
Traditionally, low-interest currencies like Japanese Yen (JPY) and Swiss Franc (CHF) are used for borrowing, while high-interest currencies like Australian Dollar (AUD), New Zealand Dollar (NZD), and emerging market currencies are used for investing. However, this depends on current interest rate conditions.
Does this calculator account for exchange rate changes?
This calculator assumes the exchange rate remains constant. In reality, exchange rates fluctuate, and these changes significantly impact carry trade profits. A favorable exchange rate movement can increase profits, while an unfavorable movement can eliminate profits or create losses.
Can I use leverage in carry trades?
Yes, many carry trades use leverage to amplify returns. However, leverage also amplifies losses. If exchange rates move against you, leveraged carry trades can result in significant losses that exceed your initial investment. Always consider your risk tolerance and use appropriate risk management.