What is a 'Rollover Credit'

 Rollover credit is the payment of interest a forex trader who holds a long position on a  currency pair overnight. An overnight position is one that does not close on the same day and is still open as of 5 p.m. EST. Currency trades happen in pairs, with a trader buying one currency with another. At 5:00 pm, the trader's account either pays out or earns interest on each position depending on the two currencies' underlying interest rates.

BREAKING DOWN 'Rollover Credit'

​​​​​​​A foreign exchange (FX) trader receives a rollover credit gets when they hold an open position in a currency trade due to the difference in the interest rates of the two currencies. If the interest rate on the currency pair held on the long side of the trade is higher than the interest rate on the short side currency, the trader will receive a rollover credit based upon the difference in the interest rates associated with the currency pair in the trade.

In forex, a rollover means that a position extends at the end of the trading day without settling. Rollovers can be credits or debits to the trader's accounts, depending which side of the trade they are holding overnight.

FX Background for Rollover Credits

​​​​​​Forex (FX) trades involve borrowing one country’s currency to purchase another country’s currency, generally at the interest rates set by the central banks who issue the currency. For trades held overnight, the seller of a currency will owe interest to the currency’s buyer at the settlement of the trade. 

For traders, most positions are rolled over on a daily basis until they close out or settle. Since FX markets trade 24 hours a day, five days per week, they arbitrarily chose 5 p.m. EST to be the close of a trading day. Therefore, any trade remaining open between 5:00 p.m. and 5:01 p.m. is subject to a rollover credit or debit. The FX market handles weekends by adding two additional days’ worth of rollover amounts to the trades held open by 5 p.m.  Wednesday. Extra rollovers also typically occur two business days before major holidays.

The majority of these rolls will happen in the tom-nex market. Meaning they are due to settle tomorrow and will extend to the following day. In most currency trades, delivery is for two days after the date of the transaction. Tom-next trades arise because most currency traders have no intention of taking physical delivery of the currency so require their positions to be rolled-over on a daily basis.

How Rollover Credits Happen

Trades between two currencies with different interest rates and relatively 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. If interest rates are the same on both currencies, the rollover credit on both sides of the trade will cancel out. However, where rates differ, the trader will earn either a credit or a debit on the currency pair trade rollover. 

  • Traders selling or having a short position in the lower-interest rate currency would pay the holder of the long position currency if its rate was higher. 

  • Should the interest rate of the long currency drop and become less than the short currency, the trader would owe the difference in the rates to the short position holder.

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. 

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 (USD) and selling Japanese yen (JPY). 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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