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Forex markets: the nuts and bolts of the carry factor


The purpose of this discussion paper is to make it possible to understand and identify sources of performance and risk that are related to the foreign currency carry factor. The concept of carry factor comes up in many asset classes, and may be further divided, for example, into:

  • rates in the context of a sharply increasing yield curve, by investing over long durations and borrowing short maturities;
  • credit in a stable market context, by investing in high-grade corporate bonds;
  • commodities in backwardation, by being the seller of long-term maturities of futures prices and buyers of cash prices;
  • equity markets, by arbitrating the spot price relative to the future price.

The carry factor of a future based on a stock index is defined as the expected value of the dividend yield minus the risk-free rate, all multiplied by the ratio of the spot price and future price. tudying this factor is essential to a «factor investing» approach, due to its presence in all the major asset classes. 

Currencies were the natural substrate for managing carry factor. The entire project is aimed at understanding the behaviour of this risk factor in different economic and geographic contexts in order to be able to decide whether it makes sense to include it when constructing a portfolio.

LEZMI Edmond , Quantitative research at Amundi

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Forex markets: the nuts and bolts of the carry factor
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