A:

In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position - simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day - the trader artificially extends the settlement period by one day.

Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy - rather, they want to profit from changes in the exchange rates. Since every forex trade is transacted by borrowing one country's currency to buy another, receiving and paying interest is a regular occurrence. At the close of every trading day, a trader who took a long position in a high yielding currency relative to the currency that he or she borrowed will receive an amount of interest in his or her account. Conversely, a trader will need to pay interest if the currency he or she borrowed has a higher interest rate relative to the currency that he or she purchased. Traders who do not want to collect or pay interest should close out of their positions by 5pm ET.

Note that the interest that is received or paid by a currency trader in the course of these forex trades is regarded by the IRS as ordinary interest income or expense. For tax purposes, the currency trader should keep track of interest received or paid, separate from regular trading gains and losses.

To learn more, see A Primer on the Forex Market, Getting Started In Forex and Common Questions About Currency Trading.

RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. How do I Implement a Forex Strategy when spotting a Sanku (Three Gaps) Pattern?

    A forex trading strategy can easily be implemented to profit from a market reversal signal that comes from the sanku, or ... Read Full Answer >>
  4. What's a good forex strategy to use when spotting a Wedge-shaped Pattern?

    Use wedge-shaped patterns to identify bullish or bearish price action when trading currencies in the foreign exchange (forex) ... Read Full Answer >>
  5. How do I use Time Segmented Volume (TSV) for creating a forex trading strategy?

    You could use time segmented volume (TSV) to build a forex trading strategy, which allows you to compare volume data to determine ... Read Full Answer >>
  6. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
Related Articles
  1. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  2. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  3. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  4. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  5. Forex Strategies

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
  6. Forex Fundamentals

    Explaining Slippage

    Slippage occurs when a trade is executed at a different price than what was expected.
  7. Forex Education

    About the EGP, or Egyptian Pound

    The EGP, or the Egyptian pound, is the currency of Egypt.
  8. Forex Education

    The History Of Money: From Barter To Banknotes

    Money has been a part of human history for at least 3,000 years. Learn how it evolved.
  9. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  10. Mutual Funds & ETFs

    UUP: Powershares DB US Dollar Bullish Fund ETF

    Explore information and detailed analysis of two popular currency exchange-traded funds, the PowerShares DB U.S. Dollar Bullish and Bearish Index Funds.
RELATED TERMS
  1. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  4. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  5. ICE LIBOR

    See LIBOR
  6. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center