My understanding is this:
I would appreciate someone verifying the accuracy of my infantile understanding of this, as well as my calculations!!
A grossly exaggerated example, granted - for demonstration purposes only!!
Assumptions:
- US Interest rate= 4%
- EU Interest rate= 12%
- EUR/USD current rate = 1.20(forget the spread for now!)
- Trading mini lots, leverage 100:1
At end of business day, you are long 1 mini lot EUR/USD
Rollover calculation:
1. €10,000.00 x 12%= €1,200.00(p.a) devided by 365= €3.2877 per day
x 1.2= $3.9452
This is the interest earned on your long position.
2. €10,000.00 x 1.2= $12,000.00 x 4% = $480.00(p.a) devided by 365
=$1.3151
This is the interest you paid on your long position
3. Net interest= $3.9452 - $1.3151= $2.6301
This represents an annual interest rate on your investment of almost 800%
-> your 1 mini lot devided by 100 (leverage) x 1.20 = $120
-> $2.6301 devided by $120 x 100 = 2.19175%
per day!!
-> multiplied by 365 = 799.98875% per annum
Happy pippin'
FP