A:

In the forex market, trades are made on many foreign currencies around the world. Much like in the equities market, in the forex there is a buyer and a seller behind every transaction. For example, in a trade on the EUR/USD currency pair, there is investor A, who is buying euros with dollars, and investor B, who is selling euros for dollars.

When a trade is agreed upon by buyer and seller, both parties have two business days to settle the deal. Continuing with our example, suppose investor B, who is selling euros, agrees to sell 100,000 euros on Monday to investor A. Investor B now has two business days - until end of the trading day on Wednesday - to deliver the 100,000 euros. However, investor B does not have to deliver by Wednesday - he or she also has the option to roll over the position to the next settlement date.

When an investor decides to roll over his or her position to the next settlement date, there is a possibility that he or she will either be charged or credited a fee. The costs arise as a result of the differential in interest rates between the two currencies that are traded. Whether an investor incurs a charge or earns a credit depends on which side of the trade the investor is on. The investor that is selling the currency with the higher interest rate will incur a charge, while the investor that is buying the currency with the higher interest rate will earn a credit. So, from our example, if the euro has a higher interest rate than the U.S. dollar, investor A would earn the credit and investor B would incur the charge.

Because positions can be rolled over within two business days, they are sometimes rolled over into a weekend when markets are closed. For example, suppose it is Wednesday and an investor is looking to roll over his or her position to Thursday. If the investor does this, the delivery date of the position changes from Friday to Saturday. However, because no trading is done on the weekend, the delivery date is changed to Sunday, then to Monday. This creates a three-day rollover, for which the investor is charged three times the normal amount.

The cost of rollover is linked to the changing interest rates of underlying currencies and, therefore, brokers are unable to offer fixed rollover fees. Furthermore, the varying sizes of the positions available for investors to take also restricts brokers from charging fixed fees. Whenever an investor incurs a charge or earns a credit, the amount is electronically deducted from or added to the investor's account. Brokers will also usually stipulate that an investor maintain a minimum margin before he or she can earn credits from a rollover.

To learn more, see Getting Started In Forex, A Primer On The Forex Market and Getting Started In Foreign Exchange Futures.

RELATED FAQS
  1. What does rollover mean in the context of the forex market?

    In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency ... Read Answer >>
  2. How is rollover interest calculated?

    In the forex market, all trades must be settled in two business days. Traders who want to extend their positions without ... Read Answer >>
  3. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  4. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Answer >>
  5. How does margin trading in the forex market work?

    When an investor uses a margin account, he or she is essentially borrowing to increase the possible return on investment. ... Read Answer >>
  6. In the forex market, how is the closing price of a currency pair determined?

    The foreign exchange market, or forex, is the market in which the currencies of the world are traded by governments, banks, ... Read Answer >>
Related Articles
  1. Forex Education

    Understanding Forex Rollover Credits And Debits

    Forex trades are subject to receiving interest or being debited interest if positions are held overnight.
  2. Investing Basics

    What Happens in a Rollover?

    In the retirement savings realm, rollover refers to transferring the holdings in one retirement account into another.
  3. Forex Education

    Forex Broker Guide: Introduction

    As of January 2012, foreign exchange market accounts for more than $4 trillion in average traded daily value, making it the largest financial market in the world. No central marketplace exists ...
  4. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  5. Economics

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
  6. Forex Education

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  7. Forex Education

    Forex Tutorial: Foreign Exchange Risk and Benefits

    In this section, we'll take a look at some of the benefits and risks associated with the forex market. We'll also discuss how it differs from the equity market in order to get a greater understanding ...
  8. Forex Education

    Forex Currencies: Ways To Trade

    By Brian PerryInvestors need to select not only a trading strategy and a currency pair but also a market in which to trade. There are several markets available to currency traders, including ...
  9. Forex Education

    Forex Tutorial: What is Forex Trading?

    What Is Forex?The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies ...
  10. Forex Education

    Forex Tutorial: Currency Trading Summary

    While this online forex tutorial only represents a fraction of all there is to know about forex trading, we hope that you've gained some insight into this topic. We also encourage those of you ...
RELATED TERMS
  1. Rollover

    A rollover is when you do the following: 1. Reinvest funds from ...
  2. Rollover Credit

    Interest paid to a forex trader who holds a position overnight. ...
  3. Rollover Risk

    A risk associated with the refinancing of debt. Rollover risk ...
  4. Rollover Rate (Forex)

    The net interest return on a currency position held by a trader. ...
  5. Forex Broker

    Firms that provide currency traders with access to a trading ...
  6. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center