When you hold a currency spot position overnight, the interest you either earn or pay is the rollover amount. Each currency has a different overnight interbank interest rate, and because you trade Forex in pairs, you also deal with two different interest rates.
The rollover rates are charged or applied to a trader's account for every position held overnight, which is after 5 pm (Eastern Time Zone), also known as the Forex rollover time.
Every open forex position earns or pays the difference between the two interest rates of the two currencies. That is, when an investor trades currency, they borrow one currency to buy another and pay or earn interest for holding it overnight. This amount is called the forex rollover rate.
If the long currency's interest rate exceeds the short currency's interest rate, the investor earns a credit. Similarly, the investor's account is debited if the long currency's interest rate is below the short currency's interest rate.
If the two currencies you are trading in are EUR and USD, with interest rates as 2% and 2.5%, respectively, and the overnight interest rate of EUR is lower than that of USD (as in this example), you pay the difference of 0.5%.
These rates are stable in a typical market environment. However, they drastically swing on a daily basis if the interbank market witnesses stress due to increased credit risk.
Let us consider an example of EUR/USD = 0.72 (exchange rate). The interest rate of EUR is 2%, and the interest rate of USD is 2.5%.
Roll over rate = (Interest rate of EUR – Interest rate of USD) / 365 * exchange rate.
In our example, the roll-over rate will be equal to:
(2– 2.5) / 365 * 0.72 = -0.5/ 262.8 = 0.001902% is the rollover rate for holding USD by borrowing EUR overnight.
An investor's calculation for the roll-over rates can highly differ from the foreign exchange charges due to what the Forex considers as the short-term interest rate for the currencies the traders trade-in, which can, in turn, result in unprecedented losses.
Since most banks are closed on Saturdays and Sundays, there is no roll-over on these days. However, the banks still apply interest on both days if your roll-over is booked on Friday at 5 pm (ET). This implies, if the account has to be debited due to the difference in the interest rates, it is debited extra for the weekend.
If either pair of the currency has a major holiday coming up, there are high chances of a holiday roll-over. A holiday roll-over is basically an extra days' worth of roll-over that occurs two business days before the holiday. This means, if you book a debit, you book an extra one due to the holiday.
When trading cross pairs or in emerging market currencies, there are times when you are aware of the roll-over rate being highly negative. In such a situation, close the positions before 5 pm ET positively.
If you are aware or have a strong feeling (backed by facts) that the roll-over rate is more likely to be positive, leave positions open.
Always keep a close look at the central bank calendar and monitor roll-over rates, especially when they may fluctuate drastically due to a market condition/instability.
By now, we already know what Forex roll-over rates are. However, the Forex swap rates comparison sheds light on how they are different from swap rates. The swap rate is the difference between the two currencies' interest rates, calculated according to if the position you are holding is long or short.
Forex roll-over rates can be both beneficial and damaging. When it is positive, the trader gains. When it is negative, he/she loses. However, if the investor closes the existing position at the ongoing daily close rate and re-enters the next day at the new opening rate, he/she successfully manages to extend the settlement period by one day, artificially.
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