Forex Carry Trade

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Forex Carry Trade

On Forex, carry trade means the simultaneous execution of two transactions opposite the date of a different value, one that closes the opened position and the other opens it at once. This is a combination of two transactions with the same volume of money, different price dates and opposite characters. The main purpose of this operation is to open an open position one night. In carry trades currencies purchased from currency pairs are conditionally added to deposits and sold as credit.

Because when maintaining a previous trading position is not known, the deposit and additional credit are settled in the opening position. This strategy can be used if the broker works with a swap. Additional or reduction of swaps depends on the difference between deposit and credit interest rates. If the interest rate deposit exceeds the credit interest rate, the swap is added to the trading account. If the loan interest rate is higher than the deposit, the swap is deducted from the trading account balance.

Let’s use the interest rate set by the central bank as an example of swap calculation. Thus the ECB interest rates at 0.05%; In the US is 0.25%. Purchase or sale of 1 lot of EUR / USD (in InstaForex equivalent to 10,000 of the underlying currency, euro in this case) at a value of 1.2702. Annual payments for swaps are ((0.05% – 0.25%) * 10,000 * 1.2702) / 100% = USD -25.404; which is USD -25,404 / 365 = USD -0.0696 per 24 hours. If we open EUR / USD long positions (or purchases), we get credit in USD at an annual interest rate of 0.25% and generate a deposit in euros at a value of 0.05% per year. Credit interest rates exceed deposit rates; Therefore USD 0,0696 is deducted from trading accounts on a daily basis. By opening a EUR / USD (or selling) sales position: the borrowed euro is valued at 0.05% per year and the deposit placed on the US dollar is at the value of 0.25% per year.

Deposit interest rates are higher than credit interest rates, so USD 0,0696 is added to trading accounts per day. To rotate the position during Wednesday-Thursday night triple swap is reduced / added. The reason is that trading that opens on Wednesday has a date value on Friday. As long as the position played on Wednesday-Thursday night the date value must be increased not only 1 day, but three days and Monday. That’s why the swap has tripled. The Carry trade strategy works well for currency pairs that have maximum differences in interest rates, for example NZD / JPY, AUD / JPY and so on. For real data, the data in October 2014 was used and can be distinguished when reading the article.

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