What you will learn
- Explain how slippage and order type change the price actually received.
- Calculate net carry and compare it with an adverse exchange-rate move.
Execution quality
A market order promises a fill but not a price, while a limit order promises a price but not a fill. In fast markets the gap between the expected and the executed price is slippage, and it can help or hurt.
Execution costs change with time and news. Quotes can widen or jump at a central bank decision, and a stop order triggered during the jump may fill several pips away from its stop level.
Rollover and interest differentials
Holding a pair means holding one currency and owing another, and each carries its own interest rate. Positions kept past the daily cut-off are credited or debited the rate difference plus a provider markup, often called rollover or swap.
Holding the higher-rate currency against the lower-rate one usually earns positive rollover, and the opposite position usually pays it. Rates change and providers differ, so the published rollover figure is the one to check.
Why carry is not free income
A carry trade holds a higher-rate currency funded in a lower-rate one to collect the difference. Carry accrues slowly, day by day, but exchange rates can move several percent within days.
Carry is payment for bearing exchange-rate risk, not an escape from it. When many positions close together, sharp reversals can erase months of interest, and leverage multiplies the damage.
Worked example: Carry versus a currency move
Take two fictional currencies: A pays 5.0% a year and B pays 1.0%. A position worth 100,000 B, held in A and funded in B, earns about (5.0 - 1.0)% × 100,000 = 4,000 B a year, roughly 11 a day. If A weakens 6% against B, the position loses 6,000, finishing about 2,000 behind despite positive carry. A 3% fall instead leaves a net +1,000.
Check your understanding
A 100,000-unit position earns a net carry of 3% a year. About how much carry accrues in 30 days, and what adverse exchange-rate move would cancel it?
Show answer and explanation
Annual carry is 100,000 × 3% = 3,000, so 30 days earns about 3,000 × 30 ÷ 365 ≈ 247. An adverse move of 247 ÷ 100,000 ≈ 0.25% cancels it, which shows how one ordinary day's move can outweigh a month of carry.