Carry Trade

On Forex, carry trade means simultaneous execution of two opposite deals with different value dates, one of which closes the already open position and the other one opens it at once. It is a combination of two deals with the same money volume, different value dates and of the opposite character. The main purpose of such operations is a roll of the open position over the night.

At carry trade the bought currency of the currency pair is conditionally added to a deposit and the sold one is taken on credit. As the time of keeping a trading position is unknown beforehand, deposit and credit accruements are accomplished at the open position rollover. This strategy can be used if a broker works with swaps. Addition or deduction of the swap depends on the difference between the deposit and credit interest rates. If the deposit interest rate exceeds the credit interest rate, the swap is accrued to a trading account. If the credit interest rate is higher than the deposit one, the swap is deducted from the trading account balance.

Let us use the interest rates set by the central banks as an example for the calculation of the swap. Thus the ECB’s interest rate is 0.05%; that of the USA is 0.25%. Purchasing or selling of 1 lot EUR/USD  (in InstaSpot it is equal to 10,000 of base currency, the euro in this case) at a rate of 1.2702. The annual payment for the swap is ((0.05% – 0.25%)* 10,000 * 1.2702) / 100% = USD -25.404; which is USD -25.404/365 = USD -0.0696 per 24 hours. In case we open a EUR/USD long position (or buy), we take a credit in USD at the interest rate of 0.25% annually and make a deposit in the euro at the rate of 0.05% per year. The credit interest rate exceeds the deposit interest rate; that is why USD0.0696 is deducted from the trading account daily.

With the EUR/USD short (or sell) position open the opposite situation occurs: the euro is borrowed at the rate of 0.05% annually and the deposit is placed in the US dollars at the rate of 0.25% yearly. The deposit interest rate is higher than the credit interest rate, so USD0.0696 is added to a trading account daily.

For rolling the position over the Wednesday-Thursday night the triple swap is deducted/accrued. The reason is that the trade open on Wednesday has the value date on Friday. During the position rollover the Wednesday-Thursday night the date of value should be increased not for 1 day, but for three days and become Monday. That is why the swap becomes triple. Carry trade strategy works well for the currency pair that have the maximum difference in interest rates, for example NZD/JPY, AUD/JPY etc. For calculations the data true on October 2014 is used and can differ at the moment of reading the article.