What Is the Rollover Rate (Forex)?
The rollover rate in foreign exchange trading (forex) is the net interest return on a currency position held overnight by a trader. That is, when trading currencies, an investor borrows one currency to buy another. The interest paid, or earned, for holding the position overnight is called the rollover rate. A currency position that’s open after 5 p.m. ET will be held overnight.
Key Takeaways
- In forex, the rollover rate is the net interest return on a currency position held overnight by a trader.
- Positions that remain open after 5 p.m. EST are considered overnight.
- A positive rollover rate is a gain for the investor, while a negative rate is a cost.
Formula for the Rollover Rate in Forex
Rrollover=365∗ERbase currency−Rquote currencywhere:Rrollover=The rollover rateRbase currency=The interest rate for the base currencyRquote currency=The interest rate for the quote currencyE=The exchange rate
The first currency of a currency pair is called the base currency, and the second currency is called the quote currency. Base and quote currency interest rates are the short-term lending rates among banks in the home country of the currency.
How to the Calculate Rollover Rate
Calculating the rollover rate involves:
- Subtracting the interest rate of the base currency from the interest rate of the quote currency.
- Dividing that amount by 365 times the base exchange rate.
Understanding the Rollover Rate
The rollover rate converts net currency interest rates, which are given as a percentage, into a cash return for the position. A rollover interest fee is calculated based on the difference between the two interest rates of the traded currencies. If the rollover rate is positive, it’s a gain for the investor. If the rollover rate is negative, it’s a cost for the investor.
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-next market, which means that the rolls are due to settle tomorrow and are extended to the following day.
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.
Example of How to Use the Rollover Rate
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 Dec. 21, 2023, is 0.63. The NZD overnight interest rate per the country’s reserve bank is 5.50%. The USD federal funds rate is 5.33%.
Therefore, using the formula above, the rollover rate would be: 5.50 – 5.33 = 0.17. 365 x 0.63 = 229.95. 0.17 / 229.95 = 0.00074.
Of course, your broker’s rollover rate may differ, as many brokers also include a fee in the rollover rate.
Rollover Rate vs. Swap Rate in Forex
The rollover rate is the cost of holding a currency pair overnight. The swap rate is the rate at which interest in one currency will be exchanged for interest in another currency—that is, a swap rate is the interest rate differential between the currency pair traded. The rollover rate can also be known as the swap fee.
Limitations of Using Rollover Rate
The difference between an investor’s calculated rollover rate and what a forex exchange charges can vary based on what the exchange considers the short-term interest rate for the respective currencies.
How Do You Calculate the Rollover Rate?
To calculate the rollover rate, subtract the interest rate of the base currency from the interest rate of the quote currency. Then divide that amount by 365 times the base exchange rate.
What Hour Does Forex Roll Over?
In the U.S., the rollover for forex occurs at 5 p.m. ET. If you were to open a position at 4:59, it would roll over one minute later. But if you open a position at 5:01 p.m., it would roll over at 5 p.m. the following day.
What Is the Rollover Strategy in Forex?
In forex, one rollover strategy is called a forex carry trade. In a carry trade you enter a long position and accumulate the rollover on a currency pair with a high interest rate spread.
The Bottom Line
The rollover rate in forex can be a drag on your profits or an advantage in your trading. Its important to check the rollover rates on your currency pairs before entering a position.
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