﻿ Forex Carry Calculations

Forex Carry Calculations

NOTE: This section assumes a familiarity with Forex trading. It is not intended as a tutorial. See http://fxtrade.oanda.com/currency_trading/intro_currency_exchange.shtml for an excellent tutorial of Forex concepts.

Here is an interest rate carry cost calculator:

http://www.oanda.com/products/fxmath/interest.shtml

Trading Blox accounts for the costs of Forex Carry by performing the following tasks each day after the close for each Forex position held:

1.Determine the quantity of both Base and Quote currency based on the price at entry. For long trades one buys the base currency and sells the quote currency, so the carry cost is determined by lending the base currency and borrowing the quote, and for shorts it lends the quote and borrows the base.

2.Determine the applicable historical lend and borrow interest rates for each currency for the day. The file contains the lend, then the borrow, rates. The calculations then assumes you borrow (pay) interest at the borrow interest rate from the history file, and that you lend (receive) interest at the lend interest rate from the file. The rate used for each day is from the current day.

3.Calculate the current days interest based on the quantity of each currency, the applicable rate for the currency, and the position direction (long or short). The base currency bought/sold is the Forex Trade Size from the global parameters. The quote currency bought/sold is this trade size times the current closing price of the forex pair.

4.Convert each of the resulting interest payments back into dollars at the then current exchange rates for the Base and Quote currencies. Rates used are current day rates.

5.Subtract what you need to pay from what you receive to get the net interest -- lending income minus borrowing payments.

6.Divide the total calculated yearly interest by 365.25 to determine the daily rate.

7.Interest is accrued/paid starting on the entry date, and includes weekends and holidays. Interest is not accrued/paid on the exit date.

Required Data Files for Forex Testing

To test a given forex instrument, you need:

Price history for the instrument.

If the forex pair is a cross, a USD to Base or USD to Quote price history so the entry and exit prices can be converted to dollars.

If you turn on carry computation you also need an interest rate history file and USD conversion file for both the Base and Quote currencies. These can be sparsely populated to include only days when the interest rates change. For example, a USD history could be done containing only those days when the Fed changes the rates.

Here is a good source of interest rate data:

https://fx1.oanda.com/user/interestrate.html

More reading on the carry cost subject available here: