Understanding Rollover
Monday, 8 November 2010
In the forex market, trades are made on many foreign currencies around the world. Much like in the equities market, in the forex there is a buyer and a seller behind every transaction. For example, in a trade on the EUR/USD currency pair, there is investor A, who is buying euros with dollars, and investor B, who is selling euros for dollars.
When a trade is agreed upon by buyer and seller, both parties have two business days to settle the deal. Continuing with our example, suppose investor B, who is selling euros, agrees to sell 100,000 euros on Monday to investor A. Investor B now has two business days - until end of the trading day on Wednesday - to deliver the 100,000 euros. However, investor B does not have to deliver by Wednesday - he or she also has the option to roll over the position to the next settlement date.
When an investor decides to roll over his or her position to the next settlement date, there is a possibility that he or she will either be charged or credited a fee. The costs arise as a result of the differential in interest rates between the two currencies that are traded. Whether an investor incurs a charge or earns a credit depends on which side of the trade the investor is on. The investor that is selling the currency with the higher interest rate will incur a charge, while the investor that is buying the currency with the higher interest rate will earn a credit. So, from our example, if the euro has a higher interest rate than the U.S. dollar, investor A would earn the credit and investor B would incur the charge.
Because positions can be rolled over within two business days, they are sometimes rolled over into a weekend when markets are closed. For example, suppose it is Wednesday and an investor is looking to roll over his or her position to Thursday. If the investor does this, the delivery date (the maturity date of a currency forward contract) of the position changes from Friday to Saturday. However, because no trading is done on the weekend, the delivery date is changed to Sunday, then to Monday. This creates a three-day rollover, for which the investor is charged three times the normal amount.
The cost of rollover is linked to the changing interest rates of underlying currencies and, therefore, brokers are unable to offer fixed rollover fees. Furthermore, the varying sizes of the positions available for investors to take also restricts brokers from charging fixed fees. Whenever an investor incurs a charge or earns a credit, the amount is electronically deducted from or added to the investor's account. Brokers will also usually stipulate that an investor maintain a minimum margin before he or she can earn credits from a rollover.
If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5:00 pm EST, the established end of the market day.
Here is a chart to help you out figure out the interest rate differentials of the major currencies. Accurate as of 10/4/2010.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought.
If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/JPY) and you will earn funds as a result.
Conversely, if the interest rate differential is negative then you will have to pay.
Ask your broker or dealer about specific details regarding rollover.
Also note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates). Please check with your broker for more information on rollover rates and crediting/debiting procedures.
When a trade is agreed upon by buyer and seller, both parties have two business days to settle the deal. Continuing with our example, suppose investor B, who is selling euros, agrees to sell 100,000 euros on Monday to investor A. Investor B now has two business days - until end of the trading day on Wednesday - to deliver the 100,000 euros. However, investor B does not have to deliver by Wednesday - he or she also has the option to roll over the position to the next settlement date.
When an investor decides to roll over his or her position to the next settlement date, there is a possibility that he or she will either be charged or credited a fee. The costs arise as a result of the differential in interest rates between the two currencies that are traded. Whether an investor incurs a charge or earns a credit depends on which side of the trade the investor is on. The investor that is selling the currency with the higher interest rate will incur a charge, while the investor that is buying the currency with the higher interest rate will earn a credit. So, from our example, if the euro has a higher interest rate than the U.S. dollar, investor A would earn the credit and investor B would incur the charge.
Because positions can be rolled over within two business days, they are sometimes rolled over into a weekend when markets are closed. For example, suppose it is Wednesday and an investor is looking to roll over his or her position to Thursday. If the investor does this, the delivery date (the maturity date of a currency forward contract) of the position changes from Friday to Saturday. However, because no trading is done on the weekend, the delivery date is changed to Sunday, then to Monday. This creates a three-day rollover, for which the investor is charged three times the normal amount.
The cost of rollover is linked to the changing interest rates of underlying currencies and, therefore, brokers are unable to offer fixed rollover fees. Furthermore, the varying sizes of the positions available for investors to take also restricts brokers from charging fixed fees. Whenever an investor incurs a charge or earns a credit, the amount is electronically deducted from or added to the investor's account. Brokers will also usually stipulate that an investor maintain a minimum margin before he or she can earn credits from a rollover.
If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5:00 pm EST, the established end of the market day.
Here is a chart to help you out figure out the interest rate differentials of the major currencies. Accurate as of 10/4/2010.
| Benchmark Interest Rates | |
|---|---|
| Country | Interest Rate |
| United States | 0.25% |
| Euro zone | 1.00% |
| United Kingdom | 0.50% |
| Japan | 0.10% |
| Canada | 1.00% |
| Australia | 4.50% |
| New Zealand | 3.00% |
| Switzerland | 0.25% |
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought.
If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/JPY) and you will earn funds as a result.
Conversely, if the interest rate differential is negative then you will have to pay.
Ask your broker or dealer about specific details regarding rollover.
Also note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates). Please check with your broker for more information on rollover rates and crediting/debiting procedures.
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Need to Know