What is 'Rollover Credit'

A rollover credit is interest paid to a forex trader who holds a long position overnight. An overnight position is one that is not closed on the same day and is still open as of 5 p.m. ET. If the interest rate on the currency on the long side of the trade is higher than the interest rate on the currency on the short side, the trader will receive a rollover credit based upon the difference in the interest rates associated with the currencies in the trade.

BREAKING DOWN 'Rollover Credit'

A rollover credit gets paid to a trader who holds an open position in a currency trade where the interest rate on one currency is higher than the interest rate for the other currency in the trade.

Forex (FX) trades involve borrowing one country’s currency to purchase another country’s currency. That borrowing generally takes place at interest rates related to those set by the central banks that issue the currencies. For any trades deemed to be held “overnight,” the seller of a currency will owe interest to the currency’s buyer at the settlement of the trade. Since FX markets trade 24 hours a day for 5.5 days per week, they arbitrarily hold 5 p.m. ET to be the close of a day. Therefore, any trade that remains open between 5:00 p.m. and 5:01 p.m. is subject to rollover credits and debits.

If interest rates are the same on both currencies, the rollover credit on both sides of the trade would cancel out. Where rates differ, the trader selling the currency with the lower interest rate would pay the difference between the interest collected by the two currencies as a rollover credit to the trader selling the currency with the higher interest rate.

Brokers automatically apply rollover credits or debits to traders' accounts. Some investors take advantage of this aspect of FX trading and try to increase their returns by earning interest with rollover credits. Trades established between two currencies with different interest rates and fairly stable exchange rates are known as carrying trades, made in the hope of harvesting rollover credits that outstrip any potential losses from fluctuations in exchange rates.

Since most FX trades settle after two days, the markets deal with weekends by appending two additional days’ worth of rollover credit to trades held open on Wednesday nights. Extra rollovers also typically occur two business days before major holidays.

Example of a rollover credit

An investor looking to make money via rollover credit would look for a currency pair where the interest rate on the currency that trader holds is higher than the rate on the currency on the other end of the trade. For example, a trader purchasing a USD/JPY trade would be buying U.S. dollars and selling Japanese yen. If the U.S. dollar’s interest rate were 2 percent and the yen’s interest rate were 0.5 percent, the trader would receive interest each day equal to a 1.5 percent annual percentage rate.

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