To receive new articles instantly Subscribe to updates.
What are Forex Rollovers?
Written by: PaxForex analytics dept - Friday, 08 January 2016 0 comments
In the forex market rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position - simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day - the trader artificially extends the settlement period by one day.
Each currency has an interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies, but their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade.
Most banks across the globe are closed on Saturdays and Sundays, so there is no rollover on these days, but most banks still apply interest for those two days. To account for that, the forex market books three days of rollover on Wednesdays,
which makes a typical Wednesday rollover three times (3x) the amount on Tuesday. There is no rollover on holidays, but an extra days worth of rollover is booked two business days before the holiday. Typically, holiday rollover happens if any of the currencies traded has a major holiday.
Here is one example; when you buy the EUR/USD pair, you are buying the euro, and selling the U.S. dollar to pay for it. If the euro interest rate is 1.00%, and the U.S. rate is 0.25%, you are buying the currency with the higher interest rate, and you will earn rollover -- about 0.75% on an annual basis. Conversely, you sell the EUR/USD pair, you are selling the currency with the higher interest rate, and you will pay rollover -- about 0.75% on an annual basis, since you are paying the euro interest rate and earning the U.S. interest rate.
Receiving rollover is an additional income stream over and above regular capital gains. For this reason, trades can be set up not only to take advantage of capital gains, but also interest income. Day traders can allow positions to stay open slightly longer to gain interest income, if they are long a higher interest rate bearing currency. Also, swing traders and investors may decide to only take longer term positions in currency pairs where they can be long the higher interest rate bearing currency.