The formulas used in the calculations are:
\[ \text{spot rate differential} = \frac{\text{settle exchange rate} - \text{initial exchange rate}}{\text{initial exchange rate}} \]
\[ \text{investment return} = \left(1 + (\text{lending rate} - \text{borrowing rate}) \times (1 + \text{spot rate differential})\right)^{\left(\frac{\text{days}}{360}\right)} - 1 \]
\[ \text{carry trade profit} = \text{amount invested} \times \text{investment return} \]
This calculator computes the Carry Trade Profit based on the input values of initial and settle exchange rates, interest rates, number of days until trade settles, and the amount invested. Carry trade involves borrowing in a low-interest-rate currency and investing in a high-interest-rate currency to profit from the interest rate differential and exchange rate movements.
Let's assume the following:
Calculate the spot rate differential:
\[ \text{spot rate differential} = \frac{0.83 - 0.85}{0.85} = -2.35\% \]
Calculate the investment return:
\[ \text{investment return} = \left(1 + (0.75\% - 0.50\%) \times (1 + (-2.35\%))\right)^{\left(\frac{180}{360}\right)} - 1 = 0.122\% \]
Calculate the carry trade profit:
\[ \text{carry trade profit} = 1,000 \times 0.00122 = 1.22 \]
Therefore, the Carry Trade Profit for this example is $1.22.
