Hi, I have a question regarding rollover. In the equity market, stock prices are reduced by the amount of the dividend on the ex-div date, or there would be an arbitrage opportunity. Does the same thing exist in the Forex market and rollover rates? I assume it does, but would like to learn about how this works. Thanks in advance for any replies.
No. Not in the same sense.
There is an opportunity to profit on the difference of interest rates, however.
Look up “carry trade”. I believe that is the closest you will come to what you’re looking for.
Thanks for the reply. I have read about the carry trade, but I don’t understand why anyone would ever hold a currency pair in which you’d have to pay interest at 5pm ET…unless the spot prices are adjusted by the rollover rate. Otherwise, why not just hold currency pairs in which you’d collect interest from 4:59 to 5:01 each day? To me, the interest is like a dividend with stocks, but maybe I’m looking at this wrong.
Because the interest is a negligible amount in relation to the profit potential from trading itself.
Well, interest rates are currently very low, historically. What about back in the early 80s, when the US Prime rate was up around 20%? Wouldn’t there be a pip or two to be made, if the spot doesn’t adjust to rollover? I’m not trying to be difficult; I’d just like to understand all the dynamics at play in the Forex market.
No one knows. The retail environment wasn’t available until the 90’s. I would imagine the opportunity for a carry trade was more prevalent.
In the forex market, every currency pair will have a swap rate. The swap rate is determined by the liquidity providers - ie the banks.
For example, for the pair GBPAUD, for if you take a Long position you will have a negative swap rate of -14 (based on 1 standard lot size).
If you take a Short position you will have a positive swap rate of 8.2. This is due to the higher Australia interest rate as compared to the UK.
But note that profiting on swaps should be taken as something of a bonus because what you can make from the trading proper is a lot more than what the swap can accumulate. Conversely, you have to also take note of negative swaps when you take a position as it will reduce your profit or increase your losses.