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.
- A rollover in forex markets refers to moving a position to the following delivery date, in which case the rollover incurs a charge.
- Depending on whether a trader has a long or short position, they may receive a rollover credit or else owe a debit.
- The rollover rate in forex is the net interest return on a currency position held overnight by a trader.
Rolling Over FX Positions
Long-term forex day traders can make money in the market by trading from the positive side of the rollover equation. Traders begin by computing swap points, which is the difference between the forward rate and the spot rate of a specific currency pair as expressed in pips. Traders base their calculations on interest rate parity, which implies that investing in varying currencies should result in hedged returns that are equal, regardless of the currencies’ interest rates.
Traders compute the swap points for a certain delivery date by considering the net benefit or cost of lending one currency and borrowing another against it during the time between the spot value date and the forward delivery date. Therefore, the trader makes money when he is on the positive side of the interest rollover payment.
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 involves 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 they borrowed will receive an amount of interest in their account.
Conversely, a trader will need to pay interest if the currency they borrowed has a higher interest rate relative to the currency that they purchased. Traders who do not want to collect or pay interest should close out of their positions by 5 P.M. Eastern.
Note that interest 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.
Example of a Rollover
Most forex exchanges display the rollover rate, meaning calculation of the rate is generally not required. But consider the NZDUSD currency pair, where you’re long NZD and short USD. The exchange rate as of Jan. 30, 2019 is 0.69. The NZD overnight interest rate per the country’s reserve bank is 1.75%. The USD federal funds rate is 2.4%.
For a 100,000 position the long interest is 9.3 EUR, or 100,000 * 0.0093%. For the short NZD, the cost is 5.01 NZD or 100,000 * 1.67 * 0.003%. The EUR converted to NZD equals 15.53, or 9.3 * 1.67. Generally displayed in pips, the NZDUSD rollover rate is -0.0026% or 0.26 pips. On a 100,000 notional position, the rollover rate would be -2.6 NZD or -3.8 USD.