Hi. I am learning the carry trade however I still don’t fully understand it. We know that in forex every position that you open will attract a cost; the spread cost in addition to swap and commission. To illustrate the issues I am having, will reuse a previously
posted example. In this example, I want to carry trade EUR/ZAR but ofcourse before doing so I must calculate the cost as well as the benefit inorder to know if this indeed will be a successful carry - a profitable carry trade.
Based on the “contract specification” in MT4, shorting 1 lot will benefit me 141.3 units in swap but going long 1 lot will take -157.3 from me. We decide to proceed with shorting 1 lot of EUR/ZAR because it does appear it will be profitable for doing so. There is still other charges so lets group them and total them as “cost” and “benefit”. Let us start with the total cost.
The “cost” is the total of all charges which include: a) spread, b) commission.
Spread
Let’s say the Bid 1.0114 and Ask 1.0124 then the spread is equal to 1.0124 - 1.0114 = 0.001.
The total spread for the transaction is 0.0002 * 100000 = 100 ZAR.
Commission
In this case our broker does not charge a commission.
The cost(total cost) = 100 . The benefit(total benefit) = 141.3. Therefore, profit = benefit - cost.
So swap profit = 141.3 - 100 = 41.3 ZARs.
Is this correct?