Carry Trade Calculator
Rate differential, borrowing, and FX risk in one P&L.
Positive FX move = funding currency strengthens against you (bad). Negative = it weakens (good).
Net profit or loss
Estimates for planning only, not financial advice.
A carry trade earns the gap between two interest rates and risks the exchange rate moving against it. Borrow at 0.5%, invest at 4.5%, and the 4% differential on $100,000 is $4,000 a year of carry. If the funding currency then strengthens 3%, conversion losses eat roughly $3,000, leaving $1,000. This calculator models both legs plus borrowing, shows the net P&L, the return on your equity, and the FX move that would wipe the carry out entirely.
How to Use This Calculator
Enter the position size in your home currency and borrowing multiple (1 for no borrowing). Set the funding rate you pay and the investment rate you earn as annual percentages. Enter the expected FX move over the holding period: positive if the funding currency strengthens against you, which hurts. Set the holding period in years. The results split the P&L into carry earned and FX gained or lost, so you can see which leg dominates.
Enter notional, borrowing multiple, and the two rates. The differential is your gross edge.
Stress-test the FX move: run 0%, then adverse moves of 3%, 5%, and 10% to find your pain threshold.
Read the breakeven FX move and the equity return. If a normal month\'s volatility exceeds the breakeven, the trade is mis-sized.
The Carry Trade Math
The breakeven line is the trade\'s margin of safety expressed as a single number. A 4% differential over one year survives almost any single FX wobble; a 1.5% differential does not survive a bad week. Borrowing scales everything: at 5:1, the equity return is five times the notional return, but the equity wipeout point is five times closer. Size the position from the FX volatility, not from the carry: the carry is the reason, the FX move is the risk.
Worked Example
You run $100,000 with no borrowing: borrow yen at 0.5%, invest in dollars at 4.5%, hold one year. Carry is $100,000 x 4% = $4,000. Scenario A: the yen weakens 2% in your favor, adding roughly $2,000: total profit $6,000, a 6% return. Scenario B: the yen strengthens 3% against you, costing roughly $3,000: net profit $1,000. Scenario C: a 5% yen surge costs $5,000 against $4,000 of carry: net loss $1,000. Breakeven is a 4% adverse move. Now add 5:1 borrowing to scenario C: the $1,000 notional loss becomes a 5% equity loss on your $20,000 of equity, and a 20% yen surge would wipe the equity entirely.
Carry Pairs and Their Typical Differentials
| Pair idea | Typical differential | Known risk |
|---|---|---|
| JPY funded, USD invested | 3 to 5% | Violent yen unwinds on risk-off shocks |
| CHF funded, AUD invested | 3 to 4% | Franc safe-haven spikes |
| JPY funded, MXN invested | 8 to 10% | Emerging-market volatility, wide swings |
Wider differentials always come with wider FX volatility; there is no free yield. The professional approach pairs the carry with a cheap hedge, like out-of-the-money options on the funding currency, accepting a smaller net carry for a capped left tail. For the FX mechanics underneath, our currency converter handles spot conversions, our currency forward calculator prices hedged rates, and our interest rate calculator annualizes any rate comparison.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is a carry trade?
A carry trade borrows in a low-interest-rate currency and invests in a high-interest-rate one, pocketing the difference. Borrow 10 million yen at 0.5%, convert to dollars, and invest at 4.5%: the 4% differential is your gross carry. The trade profits when the exchange rate stays stable and bleeds when the funding currency surges. It is yield harvesting with FX risk attached.
How do you calculate carry trade profit?
Profit = (investment rate - funding rate) x notional x time, adjusted for the exchange rate move. A $100,000 position earning a 4% differential for one year makes $4,000 of carry. If the funding currency appreciates 3% against your investment currency, you lose roughly $3,000 on conversion, netting $1,000. This calculator combines both legs and shows the breakeven FX move.
What is the breakeven exchange rate move?
The FX move that exactly wipes out the interest differential. Earning 4% of carry means the funding currency can appreciate up to about 4% before the trade loses money. This calculator computes it directly: breakeven adverse move = interest differential x holding period. Tighter differentials mean thinner margin for error, which is why carry trades cluster in high-differential pairs.
Why do carry trades blow up?
Because of crowded unwinds. When risk appetite falls, everyone rushes to repay funding-currency loans at once, spiking the funding currency and turning small losses into cascades. The yen carry unwind of August 2024 is the textbook case: years of accumulated yen-funded positions unwound in days. Carry trades collect pennies in front of a steamroller: steady small gains punctuated by violent reversals.
What is the role of borrowing in carry trades?
Borrowing multiplies both the carry and the FX risk. At 5:1 borrowing, a 4% differential becomes 20% on your equity, but a 5% adverse FX move wipes out 25% of equity. Professional carry traders size positions so that a two-standard-deviation FX shock is survivable. This calculator includes a borrowing input so you can see the equity-level return and the margin-call distance honestly.
Which currency pairs are used for carry trades?
Classic funding currencies are the yen and Swiss franc, with historically low rates; classic targets are the Australian and New Zealand dollars, the Mexican peso, and historically the Turkish lira, with high rates. The dollar plays both roles depending on the cycle. The best pair on paper is the widest differential with the most stable exchange rate, a combination that rarely persists.
Does uncovered interest parity hold?
In theory, uncovered interest parity says the FX move should exactly offset the rate differential, making carry trades zero-profit on average. In practice, high-yield currencies often fail to depreciate as much as parity predicts, which is the forward premium puzzle and the reason carry has been profitable over long stretches. The excess return is compensation for crash risk: you earn the premium until the unwind arrives.
How do central banks affect carry trades?
Rate decisions are the trade's oxygen. A funding-currency central bank hiking rates compresses your differential from below; a target-currency bank cutting compresses it from above. Intervention risk matters too: central banks sometimes act directly to weaken or strengthen their currency, and carry positions are the first casualties. Never hold carry through a funding-currency central bank meeting without a plan.
What is a reverse carry trade?
Borrowing in the high-rate currency to invest in the low-rate one, which loses the differential but can profit if the low-rate currency appreciates strongly. It is essentially a funded FX directional bet rather than yield harvesting. The math is identical with the signs flipped; the motivation is different. Most traders expressing a directional FX view just use spot or options instead.
How is carry trade income taxed?
In the US, the interest differential is generally ordinary income, while FX gains and losses on the currency conversion may get capital treatment depending on the instrument and election (Section 988 vs 1256 for futures). The mix depends on how you execute: spot forex, futures, and ETFs are taxed differently. This is genuinely complex territory where a tax advisor earns their fee before you scale the trade.