WHAT IS ROLLOVER?

Rollover is the interest paid or earned for holding a currency spot position overnight. Each currency has an overnight interbank interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies but also two different interest rates. Rollover refers to the interest either charged or applied to a trader’s account for positions held “overnight”, meaning after 5pm ET. Now we know what the rollover means, lets get into how it works in forex.

HOW DOES FOREX ROLLOVER WORK?

When a forex position is open, the position will earn or pay the difference in interest rates of the two currencies. These are referred to as the forex rollover rates or currency rollover rates. The position will earn a credit if the long currency’s interest rate is higher than the short currencies interest rate. Likewise, the position will pay a debit if the long currency’s interest rate is lower than the short currencies interest rate. For example, consider a long trade on EUR/USD and the EUR overnight interest rate is lower than the USD overnight interest rate you will pay the difference. For traders that plan to hold trades overnight, it is important to keep a close eye on the roll rates. During a normal market environment, FX rollover rates tend to be stable. If the interbank market becomes stressed due to increased credit risk, it is possible to see the rollover rates swing drastically from day to day. Some types of strategies that focus on interest rate differentials, like carry trades, attempt to take advantage of positive rollover rates by taking a long position in the currency with a high interest rate and shorting the currency with a low interest rate.

Read more on the difference between long and short positions

Rolls are only applied to positions held open at 5pm ET, so traders can avoid the risk of paying a negative roll by closing their positions prior to 5pm ET. Changes in interest rates can lead to big fluctuations in rollover rates, so it is worth keeping up to date with the Central Bank Calendar to monitor when these events occur.

CALCULATING THE FOREX ROLLOVER RATE

To estimate the rollover rate, or nominal amount, traders need three things:

1. The position size
2. The currency pair
3. The interest rate for each currency

Following this calculation tends to give a general ballpark of what the rollover would be. However, the actual rollover will deviate somewhat as the central bank rates are target rates and the rollover is a tradeable market based on market conditions that incur a spread. Let’s look at an example of how to estimate the daily rollover cost (AUD/USD 0.72):

1. 10k lot position size
2. AUD/USD currency pair long
3. 1.5% annual AUD rate, 2.5% annual USD rate

• Earn 10,000 AUD X 1.5% = 150 AUD annually. AUD 150/365 = 0.4109 AUD at rollover
• Pay 7,200 USD X 2.5% = 180 USD annually. $180/365 = 0.4932 USD
• Convert AUD 0.41095 interest earned to dollars. 0.41095*0.72 = 0.2960 USD
• Subtract amount earned from amount paid = 0.2960-0.4932 = -0.1972 USD (rollover cost)

The rollover rate estimate would simply be the long currency interest rate less the short currency interest rate. In the example above, the trader would have paid a debit to hold that position open nightly. There are forex strategies built around earning daily interest and they are called carry trading strategies. Here is an example of a trader earning a positive roll. The trader wanted to buy AUD because they felt it would appreciate. In lieu of trading it against USD, they decide to trade it against EUR. Here is an example to short 10k (EUR/AUD 1.6)

1. 10k lot position size
2. EUR/AUD currency pair short
3. 1.5% annual AUD rate, 0% annual USD rate

• Earn 10,000 X 1.6 = 16,000 AUD X 1.5% = 240 AUD annually. AUD 240/365 = 0.65 AUD at rollover
• Pay 10,000 X 0% = 0 EUR annually.
• Convert AUD 0.65 interest earned to euros. 0.65/1.6 = 0.41 EUR
• Subtract amount earned from amount paid = 0.41-0 = 0.41 EUR (rollover gain)

WHEN IS ROLLOVER BOOKED?

Rollover is booked at 5pm ET. A position opened at 4:59pm will be subject to rollover at 5:00pm. A position opened at 5:01pm will only be subject to rollover the next day at 5:00pm. If you are in America, the rollover takes place at 5:00pm. If you are in the UK, the rollover takes place at 22:00pm (GMT). If you are in Australia, the rollover takes place at 9:00am. How do banks account for Weekends? Most banks across the globe are closed on Saturdays and Sundays, so there is no rollover on these days, but the banks still apply interest on these days. To account for that, the forex market books three days’ worth of rollover interest on Wednesdays. Using the AUDUSD example above, a trader that held that trade on Wednesday at 5pm ET would incur a cost of -.1972 x 3 =0.59 How do banks account for Holidays? There is no rollover on holidays, but an extra days’ worth of rollover usually occurs two business days before the holiday. Typically, holiday rollover happens if either of the currencies in the pair has a major holiday. So, for Independence Day in the USA (July 4) when American banks are closed, an extra day of rollover is added at 5:00pm on July 1 for all US dollar pairs. If the day the rollover to be applied is on a weekend, then it gets pushed to that Wednesday which may mean 4 or 5 days worth of interest.

3 TIPS TO USE FOREX ROLLOVER TO YOUR ADVANTAGE

Some basic tips can help traders take advantage of FX rollover rates. Here are three that could help you incorporate rollover rates in your strategy:

1. Close positions before 5pm ET if you know the rollover rate is likely to be hugely negative…. this would be more applicable when trading cross pairs or emerging market currencies
2. Leave positions open if you know the rollover rate is likely to be positive and if you want to continue with the trade.
3. Keep an eye on the central bank calendar to monitor when rollover rates may fluctuate drastically.