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Understanding “rollover” in the forex market

Understanding “rollover” in the forex market

In the forex (FX) market, rollover refers to the method of stretching an open position by extending the settlement date. In a majority of currency trades, a trader is expected to take the currency delivery two days after the transaction date. Visit gold cfd

But if they choose to roll over the position while closing the existing position at the same time and at the daily close rate only to go back to the market with a new opening rate on the following day, the settlement period gets extended by a day.

Rollover rate (Forex)

The rollover rate in forex refers to the net interest return on a currency position that a trader holds overnight. That is, if you trade currencies, an investor borrows a currency to purchase another. The interest paid, or earned to keep a position overnight is known as the rollover rate. A currency position that remains open post-5 p.m. EST will be held overnight.

Calculation of rollover rate

To be able to get an estimate of the rollover rate or the minimum sum, traders require:

  1. The position size
  2. The currency pair
  3. The interest rate for each currency

Going by this calculation offers a basic ballpark of what the rollover may be. But do note that the actual rollover may digress a bit since the central bank rates are target rates and the rollover happens to be a tradeable market formed on the basis of market conditions that attract a spread.

Here’s an instance of how the daily rollover cost can be deduced (AUD/USD 0.72):

  1. 10k lot position size
  2. AUD/USD currency pair long
  3. 1.5% annual AUD rate, 2.5% annual USD rate
  • You make 10,000 AUD X 1.5% = 150 AUD annually. AUD 150/365 = 0.4109 AUD at rollover
  • You shell out  7,200 USD X 2.5% = 180 USD annually. $180/365 = 0.4932 USD
  • Convert AUD 0.41095 interest earned to dollars. 0.41095*0.72 = 0.2960 USD
  • Deduct the sum earned from amount paid = 0.2960-0.4932 = -0.1972 USD (rollover cost)

The rollover rate estimate will essentially be the long currency interest rate and not the short currency interest rate.

How does rollover over?

If a forex position remains open, the position earns or pays the interest difference between two currencies. These are known as the forex rollover rates or currency rollover rates. The position earns a credit when the long currency’s interest rate is greater than the short currency’s interest rate. Similarly, the position pays a debit when the long currency’s interest rate is less than the short currency’s interest rate. Know more professional traders

For instance, take the case of a long trade on EUR/USD where the EUR overnight interest rate is less than the USD overnight interest rate. Here, the difference will be paid by you.

For traders who want to keep trades overnight, it is necessary to monitor roll rates closely.

In a regular market environment, FX rollover rates remain stable. However, if the interbank market is stressed because of increased credit risk, one can still see the rollover rates swing dramatically on a day-to-day basis.



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