Rollover

[pinkueric]

I am bothered about the rollover concept, if I hold on to a position for a week or further, how much will I lose because interest payment. For EUR/USD pair if I remain long for couple of days, it seems I will lose out every day due to rollover.

[rhodytrader]

That's a feature of forex trading.

You earn interest on the currency you are long, and you pay it on the currency you are short. If the former has a higher interest rate than the latter, you make money. If it's lower, you lose it.

Most brokers/dealers will only charge roll-over or carry interest on positions held "overnight" (beyond the NY close). That means day traders can generally avoid the whole issue. (Oanda calculates and pays/charges continuous interest, but they are the only one I'm currently aware of).

If you are a longer-term trader, then certainly you need to take the carry into account. If the interest rate spread is small, though, then it won't matter too much.

[ddblue]

Per chance could someone elaborate on this? Rollover is a concept I'm really having trouble grasping. Could someone explain using a simple example, and expect me to ask dumb questions until I understand? Because that would be just fantastic

I'll get started by telling you guys what I do understand about rollover.

Say I go long on the USD/JPY pair. I'm buying the USD and selling the JPY, right? So which currency am I actually borrowing? Then, the interest rate of the currency I'm borrowing is put up against the interest rate of the currency I bought, and I pay the difference, right? So if I buy a micro lot (.10), I pay whatever % of 10,000?

Sorry, I realize my questions are hard to understand. I'm hoping someone out there will take pity on me and walk me through this so I can finally feel I grasp the concept.

-d

[flyinpipper]

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

[fxfrank]

Thanks for discussing. I understand the concept or the process of rollover but why on Wednesday or Thursday they charge more. for everymonth there is a rollover history (schedule) to follow.

[rhodytrader]

Originally Posted by fxfrank

Thanks for discussing. I understand the concept or the process of rollover but why on Wednesday or Thursday they charge more. for everymonth there is a rollover history (schedule) to follow.

Spot forex is actually a 2-day settlement. That's business days. That means any position held on Thursday or Friday (Wednesday too if Friday is a holiday) includes weekend interest as well in the rollover.