Skip to content
All library documents

Building an FX Carry Return Index from Spot and Interest Returns

Article Quant Q&A · Author: enrishi
Read the original

Summary

The document discusses how to construct a daily carry return index for a currency pair and compare it with a vendor index. The proposed approach combines the spot return with the interest earned on the funded currency and the interest cost on the borrowed currency. The example concerns a long-USD, short-EUR position and notes that the vendor index uses a particular base date and pricing source.

A key implementation detail is quote convention: the respondent found that the vendor calculation appeared to use the inverse EUR/USD quote rather than the less conventional USD/EUR quote. The answer also points to terminal help pages for the index formula and rate mappings, and describes a flexible swap calculation tool for inspecting positions and trades. The explanation is tentative, based on the respondent's investigation, and does not provide a complete daily calculation specification. It warns that published indices are approximate guides and may differ from a custom implementation.

Key ideas

  • A currency carry index combines spot performance with interest income and funding cost.
  • Quote direction matters; an index may use the inverse of the requested currency pair.
  • The chosen market pricing source and interest-rate mappings affect replication.
  • Vendor index methodology may not be fully reproducible from the information shown, so results are approximate.

Tags

ForexCarrySpot markets
Full text
# Generate FX Carry Return Index


# Generate FX Carry Return Index












I would like to generate a daily carry return index for a given currency pair - lets take USDEUR as an example.

I presume this involves something like taking the spot rate and the appropriate funding/deposit rates in each currency and then borrowing in EUR (pay O/N?) buy USD (earn O/N?) and then unwind at the following days spot. I'm unsure about the correct instruments and rates to use to generate the series.

Essentially I'm trying to reconcile the spot and carry return indices in Bloomberg, for USDEUR these are:





## Answer by AKdemy (score 3)

https://quant.stackexchange.com/a/63995

I would say best to ask the help desk. They probably will not replicate this for you, but explain what is used.

Here is what I think:

- `USDEURCR DES` page states it is using 1/1/1999 as the base date (value of 100) and long USD short EUR with CMPN as pricing source.

- I tried it but struggled a bit initially with a small mismatch. Turns out BBG uses inverse of EURUSD and not simply USDEUR. This makes intuitively more sense as both EURUSD and USDEUR have quotes on `ALLQ` but USDEUR is not liquid (against market convention) as `GIT` shows (roughly 1.2 million ticks vs about 170K for BGN source).

- SR is literally just $return * value\;previous\; period$

- USDEURCR is similar but has rates included. The help page found on the terminal if you copy paste `LPHP FXSW:0:1 997174` shows the formulas. These interest rates seem to be mapped according to `LPHP WCRS:0:1 628875`. So I use spot return and interest return - interest cost.

- so the computation seems to be:

Ultimately, all these indices are a rough guidance. If you care about detail, it is always best to not rely on anyone else's implementation in my opinion. `FXSW` actually is fairly flexible - and you can export the entire calc in excel (see all positions, all trades and the like).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.