Rollovers In Forex
July 15th, 2009
Understand the forex market.Rollovers are unique to the currency markets. Rollovers are transactions where an open position from one settlement date is rolled over to the next settlement date. Rollovers represent the intersection of interest rate markets and forex markets.Get good forex training.
Try Netpicks forex signals free. Remember that what you are trading is in fact the good old cash. Don’t forget currency is money after all. Rollover rates depend on the difference between the interest rates of the two currencies in the pair that you are trading.
It is like having a deposit in a bank account when you are long on a currency. It’s like take a loan from the bank if you are short. You should expect an interest gain or an interest expense on holding a currency position over time just as you would expect to earn interest on a bank deposit and pay interest on a loan.
Think of the open currency position as one currency with the positive balance (the currency you are long) and one with negative balance (the currency you are short). The difference between the interest rates between the two currencies is called the interest rate differential.
Because your accounts are in two different currencies, the interest rates of two different countries apply. You can find the interest rates of different countries from Wall Street Journal Online, Financial Times online or that matter any good financial website. You should look for the base or benchmark lending rates in each country.
The larger the impact from rollovers, the larger the interest rate differential! The smaller the impact of the rollovers, the narrower the interest rate differential! If you hold an open position past the settlement date or value date, rollovers are usually carried out by your forex broker.
Rollovers are applied to your open currency position by two offsetting trades that result in the same open position. Some online forex brokers apply the rollover rates by adjusting the average rate of your open position. Other forex brokers apply the rollover rates by applying the rollover credit or debit directly to your margin balance.
Rollovers are applied to open position after 5.00 PM EST change in value date. Rollovers are not applied if you don’t carry a position over the change in the value date. For day traders, who usually close their positions at the end of each trading day, rollovers do not apply. Rollovers only apply to your over night open position carried over to the next day.
If you are long the currency with the higher interest rate and short the currency with the lower interest rate, rollover can earn you interest income. If you are short the currency with the higher interest rate and long the currency with the low interest rates, rollovers will cost you money.