Hello, Does anyone have a formula for the return on a currency carry trade? the text says a carry trade is where you buy a currency that is trading at a forward discount by borrowing funds in a currency that is trading at a forward premium. Question 18 of reading 19 is the one I am looking at.
Also, plz confirm the formula below for roll yield is correct note that the forward contract is being sold roll yield = (F x/y - S x/y) / (S x/y) or equivalently (if prices are correct in PPP), roll yield = (ix - iy)(D/360)/[1 + iy(D/360)] terms: x is the forward discount currency y is the forward premium currency F is the forward contract you are selling S is the spot price for the forward premium currency you are selling (at time 0) i is the interest rate of the currency specified D is how many days long the forward contract is thanks