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.
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.
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.
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!!
- 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
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
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
Last edited by flyinpipper; 04-08-2007 at 04:52 AM.
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.