Forex Online Training – A Carry Trade Example and How Use it

[thomasjhordy]

A small cap investor with a forex trading account might put up say $10,000 (US dollars) to fund his or her initial positions. Most brokers will allow anywhere from 100:1 up to 500:1 leverage on that money.

Lets say for argument's sake your broker allows initial margin of 100:1 with a maximum margin of 200:1. Presuming you decide to invest (go long) in the AUDJPY cross pair (a very popular carry trade since the 1980s), how might the numbers work?

How much money can I make with $10000 capital? Based on the prevailing interest rates at the time of this writing, interest rates in Australia run about 4.5% whereas Yen rates are about 0.1%. A trader would naturally expect the Aussie dollar to appreciate against the Yen given the higher rate however this is not typically the case given the way our economies are functioning (or not depending on your persuasion) these days. Anyway...

Forex Online Training Part 1: Carry Trade

What Is the Carry Trade and How Does It Impact My Forex Trading Results? From Prof FX, Carry trade (as we may have mentioned previously) involves borrowing money at a low interest rate and investing that money elsewhere at a higher interest rate.

In order for a forex trade to earn interest (or owe interest depending on the position held) the trade must be held over night in a status brokers call rollover. This basically refers to rolling the trade over continuously – ie never actually taking delivery of the currency bought (and hence never actually delivering/returning the currency borrowed – at least until the position is eventually closed out).

Carry Trade Income (Forex Net Interest Earned) Is Called the Rollover Fee

The money earned on the position, the carry rate if you will (many times you will see it referred to as a rollover "FEE" – and may be quoted in Pips or fractional Pips), is simply the difference in overnight rates between the two currencies.

These days the AUDJPY cross is the most popular amongst carry traders because the JPY is charging 0.1% or so and the AUD is paying around 4.5% (both APRs). The net daily forex interest rate earned is then: (4.5% – 0.1%)/365, or .01205% daily. On a 10 LOT position in AUDJPY the daily interest earned would be .0001205 x 10 x 100000 = 120.50 AUD per day.

Given the AUD is trading slightly less than par with the USD, the USD equivalent of daily interest earned would be about $115 US. This comes to about $42,000 USD per year.

What About Carry Trade Rollover Fee Calculated in Pips?

If your broker quoted the rollover fee as .005 AUDJPY then you would know you would be earning half a Pip interest (rollover fee) per AUDJPY LOT. Remember a Pip of AUDJPY = .01, right? How much would half a Pip fee on the AUDJPY be in USD on a standard LOT if the AUDJPY rate is 80.70 and the AUDUSD is .9800? .005 / 80.70 x 100000 = Rollover Fee value in AUD = 6.19. AUD x AUDUSD cross = USD. 6.20 x .9800 = $6.07.

How Much Money Will I Make on My 10 Standard Lot AUDJPY Stake?

One could then compute that a trader would earn a nightly rollover fee of approximately $60.70 USD on a 10 LOT position in AUDJPY, a rate of about $22,000 / year, presuming no change in the cross rate. Not bad for an ~$10,000 investment (10 LOTs at 100:1 leverage requires ~$10,000 initial capital), no?