Hi again
This may seem like a stupid question but i will ask anyway! When you are entering a long term position do you take the interest rate differential into account or is it not sizeable enough to worry about?
Also i was wondering how brokers work out the amount they pay you. I obvously know it is the difference between the 2 interest rates, but is it worked out on the pip value , amount of pips gained that day, total profit to date on the trade etc etc.
Hi James,
Not stupid from my point of view.
I’m not sure how it is calculated, but in terms of how it is paid: each time I carry a trade overnight I get a credit or debit payment to my account at 8pm that day, or a treble payment if it is a Friday evening. The amount is never enough to enter a trade for that reason, for me; obviously it varies, but on a 100-150 pip target it’s well under a pip per day. I think the best I ever did on it was about 10% of my risk as profit, that took around two weeks - my risk is 1%, so I made about 0.1% proft over the two weeks from a beneficial interest rate. I was long AUD/CAD, from memory. The amount I earn from my broker is the same each evening, regardless of the movement on the trade, it only changes if the interest rate changes. So while I don’t know how they calculate it, it is a fixed calculation rather than one that evolves with the profit/loss of the trade.
However, I seem more often to be on the ‘losing’ side in terms of interest, so I am taking a debit payment each evening. Again, this is not enough to influence a trading decision - I find that the two roughly even out, with maybe a slight net-debit, but tbh I am targeting large enough moves that I have never taken it into account when placing a trade.
Not a complete answer, but I hope that gives you something relevant.
ST
Thanks for the info. I have emailed by broker to ask how it is calculated so I will post their reply here for everyones reference. Although it may not influence trading decisions I still want to know how they work out the debit/credit each day!!
The page below is from OANDA. (It may supplement the information your broker supplies)
Interest Rate Calculation | OANDA fxTrade
Also towards the bottom of the babypips page you will find a box
marked “Similar Threads” these may be of some help as well.
Please do post the same, this is not the first “interest rate diff” query I have come across and sure that it will be of tons of help to the new traders everywhere and a few old ones…It would be interesting to see how your broker works it out.
If you are trading a pair where there is a large interest rate differential (like AUD/JPY) then carry can add up when holding a long-term position. If the spread is narrow, then it’s not a real consideration.
As for how it’s calculated, it is based on the size of your position. Think of it in terms of having borrowed the short currency and deposited the long one. You have to pay interest on the loan and you receive interest on the deposit. So in the case of going long 100,000 EUR/USD at 1.30 you are borrowing 130,000 dollars and paying the offer rate on them and depositing 100,000 euros and receiving the bid rate on them. The difference is the carry.
Thanks for the info again. I think I am starting to understand it now. Still waiting for my brokers response so it will be interesting to see if its the same as Oanda one (guessing it will be).
Each broker may have different rates of interest depending on the amount invested and also according to the type of account that is being used.
This is an interesting subject area, but to my mind unless one is a seriously long-term position trader (at the point where one blurs the distinction between trader and investor) then the carry interest is not significant enough to make the difference between being successful or unsuccessful overall. Personally, I don’t even check the interest rates before I enter a trade, and I often hold trades for a week or two.
ST
Ok so I got a reply from my broker, IG index. It doesnt actually give much information but there is a new term they use ‘TomNext’. Here it is:
The central premise for spread betting on Forex is that you buy the currency pair if you think that the first named currency will appreciate and the second named currency will depreciate. You sell the currency cross if you think the first name currency will depreciate and the second named currency will appreciate.
If the first named currency has a higher interest rate than the second named currency, anyone long of this market would be borrowing at a lower interest rate while holding currency and therefore earning interest at a higher rate. Equally, if they were short, they would net pay interest.
When rolling-over a spot Forex position from one day to the next, it is necessary to account for these interest rate differentials. In reality the market does not simply use the interest rate differentials, it uses the TomNext. The TomNext is a market tradable swap rate, which is not just an interest differential, it also encompasses a level of market expectations concerning interest rate change and it will fluctuate constantly even when the actual interest rates are stable.
There is also a market TomNext for Gold and Silver, which equates to selling dollars to buy the commodity, so you pay interest on your short dollar position whilst you receive no interest for holding the commodity.
In addition to the TomNext charge you will also have to pay a small IG charge. For further information regarding rollovers please contact our helpdesk.
Correct which is why I was kind of looking to compare the broker in question with a few others.
And if a broker is not upfront about this kind of info, you know it’s time to move on…
See, this is what I mean - not every broker comes forward with detailed info, which makes it harder to figure out the details…
Yes i know what you mean. It really winds me up when you ask a broker a simple question and they send you paragraph after paragraph of rubbish!
What really irks me about the “legalese wrapped in a bologona sandwich” is the fact that these guys will go to any extents to avoid providing a direct answer…which is why, whenever I test out a broker, I ask their customer service a series of queries which will require a direct answer.
If they come back with an antsy response or a whitewash reply as the one posted above, I usually tell them what I think of their response and their shady determination to floss the heck of what should have been a simple response…
Idjits…
Hi again. After the last response from my broker I asked them to explain in simple terms how it is calculated and not send paragraph after paragraph of rubbish! There response:
'Please allow me to clarify exactly how we calculate the funding charges for our currency pairs.
If, for example, you were holding £30 per point of EUR/USD on our Spot contract. You would be charged £23.70 overnight.
This charged derived as follows. A few days ago, the retail spreadbet TomNext market rate was 0.08 paid if you are short and 0.12 paid if you are long for EUR/USD. On top of this our annual admin charge is 2%. This equates to 0.0055% per day. Based on a EUR/USD figure of 12843, our charge is 0.7. This gives an all-inclusive TomNext rate of 0.79 if you are short and 0.83 if you are long. This figure is simply multiplied by your amount per point. If you were short £30 the charge would be £23.70
As an alternative I would suggest trading our forward contracts. There is no daiy funding charge when trading these futures. The charge is fully incorporated in the spread, which you’ll find is wider the further dated the contract is.
Our spread on EUR/USD is often 0.8 pips. On the daily at £30 a point, the cost would be £24 initially and roughly £23.70 per day. However the spread on our June and September EUR/USD contracts is currently 10.8 points. At £30 a point the charge is initially £324 but there is no daily funding charge. As you can see this works out cheaper for you if you are looking to hold a position for more than approximately 13 days (£24+(12.66*£23.70)).
I hope this serves to adequately answer your query.
If you have any further queries please do not hesitate to contact us. Alternatively, please visit our Help and Support section where you can search for frequently asked queries.’
I did not even know that brokers charge a ‘annual admin charge’ and I have no idea what it is or why it is charged each day? Anyone have any ideas and is the charge the same with all brokers??
Think about the interest rate differential between the AUD/USD over a 12 month period. For a significant period there was a 4% plus difference in favour of buying the Aussie. A standard contract is $100,000 and at 100:1 leverage the margin is $1,000. IF a broker passes on the full rate difference, you earn 4% on the Aussie dollar over a period where the Aussie appreciated against the USD. So, 4% on $100,000 is a $4,000 gain for a $1,000 outlay. Sounds like a pretty good return to me, all things being equal.