How this calculator works
A carry trade borrows in a currency with a low interest rate, converts the proceeds into a currency with a higher rate, invests there and converts back when the position closes. The profit comes from two places: the interest differential earned over the holding period, and any change in the exchange rate. This tool computes both, using an actual/360 day count and simple interest. If the investment currency falls enough against the funding currency, the exchange loss can wipe out the interest gain. That is the classic carry-trade risk: the strategy earns small, steady returns most of the time but suffers sharp losses in stress episodes when funding currencies rally.
Formula
Invested = borrowed amount / entry rate. Value at exit = invested × (1 + lending rate × days/360) × exit rate. Repayment = borrowed amount × (1 + borrowing rate × days/360). Profit = value at exit - repayment. Return on capital = profit / borrowed amount, and the annualized return divides that by days/360.
Worked example
Borrowing 10,000 at 3%, converting at 1.10, lending at 5% for 90 days and converting back at 1.12 produces a profit of about 234.09, a 2.34% return on capital or about 9.36% annualized. A fall to 1.06 at exit would turn the same trade into a loss.
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Frequently asked questions
What is the main risk in a carry trade?
Exchange rate moves. The interest gain for a quarter is usually a few percent, while currencies can move by more than that in days. A sudden appreciation of the funding currency can cause losses far larger than the interest earned.
Does this account for leverage?
No. The calculation treats the borrowed amount as the trade size. Real carry trades are often leveraged, which multiplies both the return and the loss without changing the underlying percentage return on capital.
Why use 360 days?
Money-market interest in most currencies is quoted on an actual/360 basis. Some currencies use actual/365. Using the wrong convention shifts the interest leg slightly, which matters when comparing closely matched trades.