Rollover Explained – Invested over night

The foreign exchange market is open 6 days a week, 24 hours a day for all time zones – except on weekends. But despite this, there are definitions of what is considered ‘end of the working day’ and ‘overnight’. This is so that the currency brokers can adjust current costs according to current interest rates and the like.

What is rollover?

Rollover is the interest paid or earned to hold an overnight currency position. Each currency has an overnight interbank rate associated with it, and because the currency is traded in pairs, each trade involves not only two different currencies but also two different interest rates.

Rollover refers to the interest rate that is either debited or applied to a trader’s account for positions that are held “overnight”, which means after 22:00 British time (GMT). Now that we know what rollover means, we can find out how it works in forex.

What is a rollover?

Rollover is the interest paid or earned to hold an overnight currency position. Each currency has an overnight interbank rate associated with it, and because the currency is traded in pairs, each trade involves not only two different currencies but also two different interest rates.

Rollover refers to the interest that is either debited or applied to a trader’s account for positions held “overnight”, which means after 22:00 in the UK. Now that we know what rollover means, we can find out how it works in forex.

How does a rollover work in the forex trading market?

When a currency position is open, the position earns or pays the difference in interest rate for the two currencies. These are called forex rollover rates or currency rollover rates. The position makes money if the long-term interest rate is higher than the short-term interest rate. In the same way, the position will cost money if the long-term interest rate is lower than the short-term interest rate.

Imagine, for example, of a long position on EUR/USD and the EUR interest rate overnight is lower than the interest rate for USD overnight, so you pay the difference.

For traders who plan to trade overnight, it is important to keep track of the interest rate for this rollover. Under a normal market environment, exchange rates tend to be stable. If the interbank market becomes stressed due to increased credit risk, it is possible to see interest rates fluctuate drastically from day to day.

Some types of strategies that focus on interest rate differentials, such as carry trades, try to take advantage of positive interest rate differentials by taking a long position in the high interest rate currency and going short in the low interest rate currency.

Rollover is only applied to positions that are kept open at 23:00, so traders can avoid the risk of paying a negative rollover by closing their positions before 23:00 (GMT +1).

Changes in interest rates can lead to large fluctuations in the rollover, so it is worth keeping up to date with the central bank’s calendar to monitor when these events occur.

To lie short or long in a currency position after the end of the working day, so-called ‘rollover’ or ‘overnight’ (‘overnight’) costs you a fee that is usually based on the underlying interest rates for the two currencies that make up the currency pair you bought into. In the currency world, the end of the working day is considered to be at 17:00 EST (Eastern Standard Time), ie when the working day is over in e.g. New York (where the ‘EST’ time zone applies). In Sweden we are in the time zone CET (Central European Time) or GMT +1 and the corresponding time in Sweden is 23:00.

The time zone EST is usually -6 hours in relation to what time it is in Sweden. However, it can vary one hour in both directions when Europe has switched to summer time and winter time, respectively, because in the USA you do not switch to summer time / winter time on the same date.

Time in London right now

Time in New York (EST) right now

How To Calculate the Interest Rate for a Rollover

To calculate the interest rate for a rollover, or the nominal amount, forex traders need to know three things:

Position size

2. The currency pair

3. The interest rate for each currency

With this information, it is possible to make a calculation that tends to give a general idea of ​​what the cost of a rollover would be. However, the actual cost will deviate slightly as central bank interest rates are target interest rates and the transfer is a marketable market based on market conditions that entail a spread.

Let’s look at an example of how we estimate the daily transfer cost (AUD / USD 0.72):

Position size of 10,000 lots

2. AUD / USD currency pairs far

3. 1.5% annual AUD, 2.5% annual USD

The position thus earns money in one leg, 10,000 AUD X 1.5% = 150 AUD annually. 150/365 AUD = 0.4109 AUD at rollover.

The position thus costs money in the other leg, 7,200 USD X 2.5% = 180 USD annually. 180/365 = 0.4932 USD

Convert AUD 0.41095 interest rate to dollars. 0.41095 * 0.72 = 0.2960 USD

Subtract the amount earned from the amount paid = 0.2960-0.44932 = -0.1972 USD (the cost of a rollover)

The estimate of rollover interest rate would simply be the interest rate of the long currency minus the interest rate of the short currency.

In the example above, the trader would have paid a cost to keep that position open every night. There are currency strategies built around earning daily interest and they are called carry trade. Here is an example of a trader who serves a positive role.

The trader wanted to buy the AUD because he felt that the Australian dollar would be revalued. Instead of trading AUD against USD, the trader decides to trade AUD against EUR. Here is an example of short 10k (EUR / AUD 1.6)

Position size of 10,000 lots

Currency pairs EUR / AUD cards

3. 1.5% annual AUD rate, 0% annual USD rate

The position thus earns money in one leg, 10,000 X 1.6 = 16,000 AUD X 1.5% = 240 AUD annually. AUD 240/365 = 0.65 AUD at rollover.

The other leg of the position usually costs interest, but in this example it is zero. The currency trader then pays 10,000 X 0% = 0 EUR annually.

Convert 0.65 AUD interest earned to euros. 0.65 / 1.6 = EUR 0.41

Subtract earned amount from paid amount = 0.41-0 = 0.41 EUR (profit on rollover)

When is the rollover settled?

The transaction is booked at 22:00 GMT. A position that opens at 21.59 will be subject to rollover at 22.00. A position that opens at 22:01 will only be subject to rollover if it has not been closed the next day at 17:00.

If you are in America, rollover takes place at 17.00.

If you are in the UK, rollover takes place at 22:00 (GMT).

If you are in Australia, rollover takes place at 9:00.

How do rollovers work over the weekends?

Most banks around the world are closed on Saturdays and Sundays, so there is no rollover these days, but banks still apply interest rates these days. To account for this, the foreign exchange market books three-day rollovers on Wednesdays. Using the AUDUSD example above, a currency trader who held the position above on Wednesday at 5 pm ET would incur a cost of -1972 x 3 = 0.59

How does it work on red days?

There are no rollovers on public holidays, but an extra day of rollovers usually takes place two working days before the red day. This usually happens if one of the currencies of the couple has a major holiday. So for Independence Day in the United States (July 4), when US banks are closed, an extra day for the rollover is added to 5pm on July 1 for all US dollar pairs. If the day the transition to be applied is on a weekend, it is postponed to that Wednesday, which can mean 4 or 5 days interest.

Three tips to use the rollover to your advantage

Some basic tips can help traders take advantage of currency rates. Here are three tips to help you integrate rollovers into your strategy:

Close positions before 5pm ET if you know the rollover is likely to be hugely negative. This would be applicable when trading cross currencies or currencies in emerging markets.

Leave positions open if you know that the rollover is likely to be positive and if you want to keep your position open.

Keep an eye on the central bank’s calendar to monitor when the rollover can vary drastically.

›› Here you can read the rest of the articles in our forex school.