Rollover interest in the forex market

 In the spot market, all transactions must be settled within two business days. Rollover refers to the process of closing an open position for today's value date and opening the same position for the next day's value date at a rate that reflects the difference in interest rates between the two currencies.

In accordance with international banking practice, forex brokers automatically roll over all open trading positions to the next date at 5 PM EST.

Rollover involves exchanging an open position for a trading position that will expire on the next settlement date. For example, for trades executed on Monday, the value date is Wednesday.

However, if a position opened on Monday and remains open overnight, then the value date becomes Thursday. The exception is in the case of positions that remain open on Wednesday nights. The usual date of the value is supposed to be a Saturday; But because the banks are closed on Saturdays, the value date will practically be the following Monday. Since there are weekends, overnight trading positions on Wednesday will incur or earn interest for an additional two days.

Deals whose value date falls on holidays also will incur or earn additional interest. Forex traders can earn interest on rollover depending on the direction of their trading positions and the difference in interest rates between the two currencies traded.

For example, the prime rate in Great Britain is higher than that of Japan, so if a trader buys the British pound, he will earn interest by 5pm EST. On the other hand, if he sells the pound in this currency pair, he will be paying interest at 5 PM EST.

Fixing interest is automatically paid to the customer's account after purchasing the currency with a higher interest rate in its country, while it is debited from the customer's account if the country that issues the currency offers base interest rates lower than the corresponding currency.

Previous Post Next Post