Carry Trade Calculator
A carry trade earns (or costs) the interest-rate differential between the currency you buy and the currency you sell. Enter the initial and settlement exchange rates, the lending and borrowing rates, the investment amount, and the number of days you plan to hold the position. The calculator shows your spot P&L, carry income, daily carry, annualised return, and combined profit in your account currency.
What is a carry trade?
A carry trade is a foreign-exchange strategy where you borrow money in a currency with a low interest rate and invest it in a currency with a higher interest rate. The goal is to pocket the difference, known as the carry or the interest-rate differential. For example, if the Japanese yen has a policy rate near 0% and the US dollar has a rate near 5%, borrowing yen and buying dollars earns roughly 5 percentage points per year on the notional position, before accounting for any exchange-rate movement. Carry trades are one of the most widely used strategies in currency markets, popular with hedge funds, institutional investors, and retail forex traders alike. The strategy tends to work well during periods of low volatility and stable macro conditions, and tends to unwind quickly when risk appetite falls, which is why the yen is sometimes called the quintessential funding currency: large carry unwinds can cause sharp yen spikes as traders close positions simultaneously.
How carry trade profit is calculated
The carry profit depends on three things: the interest-rate differential, the exchange-rate movement, and the size and duration of the position. The formula used here follows the standard market convention. First, the spot rate differential is computed as (settlement rate minus initial rate) divided by the initial rate: this is the percentage change in the exchange rate over the holding period. Second, the investment return is calculated as (1 plus (lend rate minus borrow rate) times (1 plus the spot rate differential)) raised to the power of (days held divided by 360), minus 1. This compound formula captures both the pure interest income and the way exchange-rate movements interact with that income, because a rising base currency increases the dollar value of each interest payment. Finally, carry profit equals the notional position size (your equity multiplied by your leverage) times the investment return. The spot P&L is calculated separately as notional times the effective spot differential, and the two are added to get total P&L.
The role of leverage and position sizing
Carry trades are often run with leverage because the raw interest-rate differential, while real, is modest compared with the price swings currencies can experience. A 1x unlevered position in USD/JPY might earn 5% per year in carry, which is attractive but not dramatic. At 10x leverage, the same differential earns 50% on invested capital, but a 1% adverse exchange-rate move now costs 10% of equity. This amplification cuts both ways. Many professional carry traders target a specific carry-to-risk ratio and size positions accordingly, rather than simply maximising leverage. The notional output in this calculator shows the full exposure you are taking on, so you can relate potential carry income to potential currency risk. A useful rule of thumb: the exchange-rate move that would wipe out one year of carry income is roughly equal to the annual interest-rate differential. If you earn 4% carry annually, a 4% adverse move in the spot rate reduces your net return to zero for that year.
Risks and limitations of carry trading
Carry trades are not free money. Exchange-rate risk is the largest threat: a currency pair can move several percent in a day, easily overwhelming weeks or months of accumulated carry income. Central bank risk is the second key factor: an unexpected rate hike in the funding currency or rate cut in the high-yield currency collapses the differential almost overnight. Liquidity risk matters during market stress, when carry trades can unwind violently as everyone exits at once, widening spreads and making it hard to close positions at the expected price. Transaction costs (bid-ask spreads and broker swap fees) reduce effective carry and are not modelled here. Finally, the 360-day year convention used in the formula is standard for forex but some brokers use 365-day conventions, and swap rates offered by brokers are often different from raw central bank rates. Always verify the actual overnight swap rates your broker charges or credits, rather than relying purely on policy rates.
Typical carry trade interest rate differentials (2025)
| Currency pair | High-yield leg | Funding leg | Approx. differential | Typical direction |
|---|---|---|---|---|
| USD/JPY | USD (~5.25%) | JPY (~0.1%) | ~5.15% | Long USD / Short JPY |
| AUD/JPY | AUD (~4.35%) | JPY (~0.1%) | ~4.25% | Long AUD / Short JPY |
| NZD/JPY | NZD (~5.5%) | JPY (~0.1%) | ~5.4% | Long NZD / Short JPY |
| USD/CHF | USD (~5.25%) | CHF (~1.5%) | ~3.75% | Long USD / Short CHF |
| EUR/JPY | EUR (~4.0%) | JPY (~0.1%) | ~3.9% | Long EUR / Short JPY |
| GBP/JPY | GBP (~5.25%) | JPY (~0.1%) | ~5.15% | Long GBP / Short JPY |
Representative policy rates for popular carry trade currency pairs. Rates change frequently - always verify with your broker or central bank.
Frequently asked questions
What is the carry trade formula?
The core formula is: Investment Return = (1 + (lend rate - borrow rate) x (1 + spot rate differential))^(days/360) - 1. Carry Profit = notional position size x investment return. The spot rate differential is (settlement rate - initial rate) / initial rate. The notional is your invested capital multiplied by your leverage factor. This formula compounds the interest-rate differential with the spot move, reflecting that a rising base currency increases the value of each interest payment.
What currencies are best for carry trading?
Carry trades pair a high-yield currency (the long leg) with a low-yield funding currency (the short leg). Historically popular high-yield currencies include the Australian dollar (AUD), New Zealand dollar (NZD), and US dollar (USD) during high-rate periods. The Japanese yen (JPY) and Swiss franc (CHF) are classic funding currencies because of persistently low rates. The most traded carry pairs have historically been AUD/JPY, NZD/JPY, and USD/JPY. However, the best pair at any given time depends on the current rate environment - always check live central bank rates rather than relying on historical norms.
How does leverage affect carry trade returns?
Leverage multiplies both carry income and risk proportionally. If you invest $10,000 at 10x leverage, your notional position is $100,000, and you earn carry on the full $100,000 even though you only put up $10,000. This boosts returns on invested capital dramatically. However, exchange-rate movements also work on the full $100,000. A 1% adverse move in the spot rate produces a $1,000 loss (10% of your $10,000 equity), regardless of how much carry you have accumulated. Higher leverage is therefore only sensible with tight risk management and a carry differential large enough to compensate for the added risk.
Can a carry trade lose money even with a positive rate differential?
Yes, and this is the most important risk to understand. Even if you earn 5% per year in carry, a 6% adverse move in the exchange rate produces a net loss for the year. During financial stress, carry trades are notorious for sharp, sudden unwinds: the yen carry trade, for instance, saw massive reversals in 2008 and 2022 as risk sentiment shifted. The key rule of thumb is that carry income provides a buffer, not a guarantee. Your maximum tolerable adverse exchange-rate move is approximately equal to the carry income you expect over the holding period.
What is the difference between carry profit and total P&L in this calculator?
Carry profit measures only the return from the interest-rate differential over the holding period - the money you would earn even if the exchange rate never moved. Spot P&L is the gain or loss from the exchange rate moving between your entry and exit. Total P&L adds the two together. If you enter the same rate for initial and settlement, the spot P&L is zero and carry profit equals total P&L. If the currency you bought appreciated, spot P&L is positive and total P&L exceeds carry profit. If it depreciated, spot P&L is negative and may offset or exceed your carry income.
Why does this calculator use a 360-day year?
Forex markets use the Actual/360 day-count convention by default for interest calculations, meaning interest accrues over actual calendar days but the annual rate is divided by 360 rather than 365. This is the market standard used by most banks and brokers. Some institutions use Actual/365 (more common in sterling markets), which would give a slightly different result. The difference is small - roughly 1.4% on the annual rate - but worth knowing if your broker quotes swap rates on a different convention.