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Estimating Carry on a Foreign-Currency Bond Position

Article Quant Q&A · Author: SwapperAtPar
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Summary

The document asks how to estimate the carry from holding a long-duration bond denominated in a foreign currency. The proposed calculation combines the cost of borrowing cash, the forward points on exchanging dollars for local currency, and an adjustment for the bond’s duration. A Chilean peso example illustrates converting a one-month currency forward difference into a dollar amount, then dividing by the bond’s duration to express the result as a monthly cost per duration unit.

The example frames the calculation but does not establish that this is a complete or correct P&L method; it asks whether anything is missing. It gives no answer or supporting analysis. In practice, the estimate would need clearly defined units and assumptions, and may omit such effects as bond yield income, currency exposure, financing terms, and changes in bond price or exchange rates. The note is useful as a prompt for identifying carry components, rather than as a validated calculation.

Key ideas

  • A foreign-currency bond position combines local bond exposure with currency conversion and funding costs.
  • The proposed method uses forward points to estimate the currency carry over a holding period.
  • The example scales a currency cost by bond duration, but does not validate that adjustment.
  • A full P&L estimate depends on assumptions and components the document leaves unspecified.

Tags

Fixed incomeForexCarryRisk management
Full text
# Cost of carry when holding a foreign ccy bond


# Cost of carry when holding a foreign ccy bond












In the search of yield holding HY bonds in EM markets seems to be a theme that gains traction. In order to calculate the P&L correctly I just wanted to see I have it correct!

Assumption is

- Borrow cash (at internal cost)

- Sell USD, buy Local ccy at X Forward Points (negative or positive depends on the curve shape)

- Now adjust for duration to find the cost of holding time in basis points

For example Chilean Peso (CLP) Bonds:

Buy CLP 1m @ 803 vs spot @ 800 = -3 peso per a month = 37500 per 10mm USD

Buy a 10y bond with Dur = ~8k

37500/8000 = cost of carry per a month

Is this assumption correct or I am missing something?

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.