Rollover Rate (Forex)

DEFINITION of 'Rollover Rate (Forex)'

A rollover rate, in regard to forex, is the net interest return on a currency position held by a trader. The rollover rate converts net currency interest rates, which are given as a percentage, into a cash return for the position. Since a trader is long one currency and short another, the net effect of both interest rates has to be calculated.

In forex, a rollover means that a position is extended at the end of the trading day without settling. For traders, most positions are rolled over on a daily basis until they are closed out or settled. The majority of these rolls will happen in the tom nex market. Meaning they are due to settle tomorrow and are extended to the following day.

BREAKING DOWN 'Rollover Rate (Forex)'

For example, an investor has a long 100,000 EUR/USD at a rate of 1.3000. The EUR interest rate is 2%, or a daily rate of 0.0054%, and the USD is 3% or a daily rate of 0.0081%.

The interest on the EUR is (100,000 * 0.0054%) 5.40 EUR; the USD costs (130,000 * 0.0081%) 10.53 USD. Converting the EUR to USD, 5.40 * 1.3000 = USD 7.02. The net USD amount is 7.02 - 10.53 = - 3.51, which is divided by the 100,000 position. On a long EUR/USD position, the rollover costs 0.00003562, or 0.3562 pips.

While the daily interest rate premium or cost is small, investors and traders who are looking to hold a position for a long period of time should take into account the interest rate differential. It is possible that over a period of time you could buy currency X and sell it at a lower rate and still make money, assuming the currency you owned was yielding a higher rate than the currency you were short.