Currency is money, after all
Rollover rates are based on the difference in interest rates of the two currencies in the pair you’re trading. That’s because what you’re actually trading is good old-fashioned cash. When you’re long a currency, it’s like having a deposit in the bank. If you’re short a currency, it’s like having borrowed a loan. Just as you would expect to earn interest on a bank deposit or pay interest on a loan, you should expect an interest gain/expense for holding a currency position over the change in value.
Think of an open currency position as one account with a positive balance (the currency you’re long) and one with a negative balance (the currency you’re short). But because your accounts are in two different currencies, the two interest rates of the different countries apply.
The difference between the interest rates in the two countries is called the interest-rate differential. The larger the interestrate differential, the larger the impact from rollovers. The narrower the interest-rate differential, the smaller the effect from rollovers. You can find relevant interest-rate levels of the major currencies from any number of financial-market Web sites. Look for the base or benchmark lending rates in each country.
Applying rollovers
Rollover transactions are usually carried out automatically by your forex broker if you hold an open position past the change in value date.
Rollovers are applied to your open position by two offsetting trades that result in the same open position. Some online forex brokers apply the rollover rates by adjusting the average rate of your open position. Other forex brokers apply rollover rates by applying the rollover credit or debit directly to your margin balance.
Here’s what you need to remember about rollovers:
- Rollovers are applied to open positions after the 5 p.m. ET change in value date, or trade settlement date.
- Rollovers are not applied if you don’t carry a position over the change in value date. So if you’re square at the close of each trading day, you’ll never have to worry about rollovers.
- Rollovers represent the difference in interest rates between the two currencies in your open position, but they’re applied in currency-rate terms.
- Rollovers constitute net interest earned or paid by you, depending on the direction of your position.
- Rollovers can earn you money if you’re long the currency with the higher interest rate and short the currency with the lower interest rate.
- Rollovers cost you money if you’re short the currency with the higher interest rate and long the currency with the lower interest rates.
Source: Currency Trading For Dummies
