A foreign currency exchange (forex or FX) rollover is when you extend the settlement date of an open position. In most currency trades, a trader must get the currency two days after the transaction date. Rolling over the position involves closing the existing position at the present exchange rate at the daily close and then reentering at the trade at the next trading day’s open. By doing so, you artificially extend the settlement period by one day.
Key Takeaways
- A rollover in forex markets involves moving a position to the following delivery date, in which case the rollover incurs a fee.
- Depending on whether you have a long or short position, you may be due a rollover credit or debit.
- The rollover rate in forex is the net interest return on a currency position held overnight by a trader.
Every weekday, the currencies of just about any nation are traded electronically in the world’s largest, most liquid market. Like a tourist exchanging their cash for local currency abroad, forex traders, including governments, banks and other financial institutions, corporations, and retail investors, seek to convert one currency to the other. But unlike the tourist, their speculation involves betting on the direction of changing rates of currency pairs. These forex traders convert large sums of money from one currency to the other in the forex market, which trades twenty-four hours a day, trying to profit from moves in exchange rates.
Below, we lead you through the mechanics of a rollover so you understand what it means when trading in the forex market.
Rolling Over FX Positions
A crucial aspect of FX trading is the rollover, which can make or break your profits, depending on how you handle it. For those who hold positions long-term or overnight, rolling over is the process of extending the settlement date when you have to close your position. Essentially, when you hold a currency pair position, you must deal with changes in the exchange rate, figured in light of the interest rate differences between the two currencies in the pair, which can either work for or against you.
This is when the rollover equation comes into play. Profiting from forex trading frequently involves holding a currency and waiting for the exchange rate to move in your favor. If you buy a currency and its value increases compared with the currency it’s paired with, you can sell it for a profit. When you hold a currency pair overnight, you earn interest on the currency you are buying and pay interest on the currency you are selling. This is the rollover or swap. If the currency you are holding has a higher interest rate compared with the one you are borrowing, you might earn a positive rollover, which adds to your profits. Conversely, you might incur a cost if the interest rate is lower.
To calculate gains or costs for a rollover, traders use swap or forward points. These represent the differential between the forward rate and the spot rate or present market price of the currency pair, measured in pips. By tallying the swap points for a given delivery date, you can evaluate whether there’s an advantage to lending one currency and borrowing another over the period extending from the spot value date to the forward delivery date. If the calculations reveal that the interest earned on the lent currency exceeds the interest paid on the borrowed one, you’ll be on the positive or profitable side of the equation.
Rollover Credit and Debit
Often referred to as tomorrow next or tom-next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy. Instead, they want to profit from changes in the exchange rates. Since every forex trade involves borrowing one country’s currency to buy another, receiving and paying interest is a regular occurrence. At the close of every trading day, if you took a long position in a high-yielding currency relative to the currency you borrowed, you receive interest in your account.
On the other hand, you’ll need to pay interest if the currency you borrowed has a higher interest rate than the currency you purchased. Traders who do not want to collect or pay interest should close out of their positions by 5 p.m. Eastern time.
The rollover has two implications for a trader’s strategy. First is the cost of holding a position overnight, as traders pay or earn interest depending on the direction of their trade and the relative interest rates of the currencies involved. Second, it influences trading decisions, particularly for strategies that aim to benefit from interest rate differences.
Keep Track of Interest Received/Paid
The Internal Revenue Service treats interest received or paid by a currency trader during forex trades as ordinary interest income. For tax purposes, you should keep track of interest received or paid, separate from regular trading gains and losses.
Example of a Rollover
Suppose you execute a trade involving the euro and the U.S. dollar. You buy 100,000 EUR/USD at an exchange rate of 1.20. In addition, let’s say the European Central Bank’s (ECB’s) benchmark rate is 0.5% and the fed funds rate is 1.75%, and you’re holding the position overnight.
Given that, interest would need to be paid or sent to the trader for holding it overnight. The rollover interest earned or paid is calculated on the notional amount, in this case, 100,000 euros.
RolloverInterest=NotionalAmount∗(InterestRateDifferential/365)
Let’s label these:
- Notional amount = 100,000 euros
- Interest rate differential = ECB benchmark rate – fed funds rate = 0.5% – 1.75% = -1.25%
Thus, the overnight rollover would be as follows:
100,000∗(−1.25%/365) = -3.42 euros or -0.00342%
This example simplifies matters for illustration purposes. In practice, rollover calculations can be complex and influenced by broker-specific policies and market liquidity.
What Is the Rollover Rate in FX?
The rollover rate in forex is the net interest return on a currency position held overnight by a trader. This is paid because a forex investor always effectively borrows one currency to sell it and buy another. The interest paid or earned for holding such a loaned position overnight is called the rollover rate.
What Is a Rollover Credit vs. Debit?
A currency trader receives a rollover credit when maintaining an open position overnight in a currency trade. This involves being long a currency with a higher interest rate than the one sold. A rollover debit, meanwhile, is paid out by the trader when the long currency pays the lower interest rate.
When Are FX Rollovers in Effect?
In forex, a rollover means that a position extends at the end of the trading day without settling. Most forex trades roll over daily until they close out or settle. The rollovers are conducted using either spot-next or tom-next transactions.
Suppose a trader entered a position on Monday at 4:59 p.m. Eastern time and closed it the same day at 5:03 p.m. Eastern. In that case, this will still be considered an overnight position since the position was held past 5 p.m. Eastern and is subject to rollover interest.
The Bottom Line
A rollover in forex trading is the procedure of extending the settlement date of an open position to the next trading day. This occurs when a trader holds a position overnight, beyond the standard two-day settlement period for most currency pairs. Rolling over is a critical concept for forex traders, as it involves the adjustment of interest rates between the two currencies in the pair. Traders either earn or pay interest based on these differentials, which can significantly impact the overall profitability of their trades, especially for positions held over longer periods.
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