Equilon FXKeep these questions in view.
- Income and currency revaluation both included?
- Financing terms and leverage specified?
- Costs and the period stated?
Use Full reading for the reasoning, worked example and original references.
Separate income from revaluation
A currency carry discussion involves financing in one currency and exposure to another. The apparent income difference and the change in the exchange value of the exposure are distinct components. Treating the first as the entire outcome ignores the second, as well as financing terms and costs.
Use a complete accounting frame
A useful hypothetical example states the starting conversion, the income assumptions, the ending conversion and the financing liability. Leverage changes the relationship between a market movement and the investor’s equity. A result calculated before fees, taxes or changing rates should be labelled accordingly.
The funding rate may not stand still
Policy rates are not identical to the terms every participant can borrow or invest at. Funding arrangements, collateral, credit risk and transaction costs can differ. A spread between two central-bank rates is therefore not a quoted, executable return available to every reader.
Positioning can affect the reaction
BIS research discusses how carry positions and their unwinding can influence currency responses to policy changes. That is a reminder that the starting position of the market matters. It is not a formula giving the direction or size of a move from a rate announcement alone.
Read historical claims carefully
An explanation of how a past carry episode worked is not a recommendation to reproduce it. Ask whether the account includes currency losses, costs, drawdowns and leverage. An income figure without that context can conceal the part of the result that mattered most.
An income gain and a currency loss
Take a simplified unleveraged foreign holding worth 100 domestic units at the start. It earns 4% in foreign currency, but that currency loses 6% against the domestic currency. The ending domestic value is 100 × 1.04 × 0.94 = 97.76, before costs. Positive income coexists with a 2.24% loss in domestic value.
What kind of statement is this?
Funding & risk / Mechanism + worked example / A framework for interpretation
An interest-rate difference does not remove exposure to the exchange rate.
This material does not establish a future policy decision, a live exchange rate or the direction of the next market move. Those questions require dated evidence and a specific comparison.
A foreign holding earns 4% while its currency falls 6% against the base. What is the pre-cost base-currency return?
Keep the language clear Three useful definitions
Carry — The income or cost associated with holding or financing a position over time. It is only one component of a total return. Read more ↗
Funding currency — The currency in which a position is financed. A low financing rate does not remove the risk of converting or repaying that currency. Read more ↗
Exchange rate — The price of one currency expressed in another. The order of the currencies determines the units. Read more ↗
Original references.
Institutional descriptions were prepared against these references for this edition. Follow the source for current decisions, releases and methodology. Numerical examples on this page are illustrative.