1. What is a Carry Trade?

A carry trade is a strategy in foreign exchange markets where an investor borrows money in a currency with a low interest rate and invests in a currency with a higher interest rate, profiting from the interest rate differential.

2. How Does the Calculator Work?

The calculator uses the carry trade formula:

Where:

• \( rate_{high} \) — Interest rate of investment currency (%)
• \( rate_{low} \) — Interest rate of funding currency (%)
• \( amount \) — Investment amount (currency)
• \( time \) — Investment period (years)

Explanation: The equation calculates the profit from the interest rate differential over a specific time period.

3. Importance of Interest Rate Differentials

Details: Interest rate differentials are a key driver of currency movements and carry trade profitability. Central bank policies and economic conditions affect these rates.

4. Using the Calculator

Tips: Enter interest rates as percentages (e.g., 5.25 for 5.25%), investment amount in your base currency, and time period in years.

5. Frequently Asked Questions (FAQ)

Q1: What are the risks of carry trades?
A: Currency risk is the main concern - if the high-yielding currency depreciates, it can wipe out interest gains.

Q2: What's a typical interest rate differential?
A: Differentials vary but 2-5% is common. Extreme cases (like Turkish Lira vs. Japanese Yen) can exceed 10%.

Q3: How does leverage affect carry trades?
A: Leverage magnifies both potential profits and losses. This calculator shows unleveraged returns.

Q4: What time frame is best for carry trades?
A: Carry trades typically work best over months to years, not days or weeks.

Q5: Are there tax implications?
A: Yes, interest income and currency gains may be taxable. Consult a tax professional.