What does ‘Cost of Carry’ in forex mean?
The ‘cost of carry’ in forex refers to the expenses associated with holding a currency position over a period of time. It includes interest payments, dividends, and other costs that are incurred when an investor holds a currency with a higher interest rate compared to the one being borrowed.
The cost of carry also accounts for any differences in interest rates between the two currencies involved in the trade. Traders consider the cost of carry when deciding whether to hold a particular currency position or not, as it can affect the overall profitability of the trade.
Example of ‘Cost of Carry’ in forex
Let’s say you are a trader based in the United States and you decide to go long on the EUR/USD currency pair. The interest rate in the United States is 2%, while the interest rate in the Eurozone is 0.5%.
This means that you will receive 0.5% less interest on your long position in the EUR/USD pair compared to what you would earn if you had invested in US Dollars. This lower interest rate represents the cost of carry.
In addition to the interest rate differential, other costs such as brokerage fees, transaction costs, and taxes may also be factored into the cost of carry. These costs can vary depending on the specific broker and the trading platform being used.