How to Calculate FOREX Rollover Rates

by Cam Merritt

In the foreign exchange spot market, trades must be settled within two business days. That means that if you've taken out a position in which you buy, say, $10,000 worth of euros, you have two days to pick up your euros. Most "FOREX" traders, however, aren't actually in the currency market to obtain currency; rather, they're speculators, trying to profit from movements in exchange rates -- the values of currencies relative to one another. So at the end of the day, they have their broker "roll over" their position -- essentially closing one position and opening an identical position, thus delaying settlement. Forex traders typically aren't making trades with their own money; they're using money borrowed from their broker. When you roll over that borrowed money for another day, the broker will calculate the rollover rate, or the interest due. Sometimes you pay rollover interest -- but sometimes you receive it. It depends on the short-term interest rates on the currencies involved in your trade.

Get the exchange rate for the currency pair involved in the trade. Currencies are always traded in pairs -- you buy one currency and sell the other. For this example, say you buy U.S. dollars and sell euros. Your currency pair is USD/EUR. (If you bought euros and sold U.S. dollars, the pair would be EUR/USD.) The exchange rate tells you how many of one currency you can get for one unit of the other. So a USD/EUR exchange rate of 0.9532 means $1 equals 0.9532 euros. Current exchange rates are readily available on hundreds of FOREX and general-interest financial websites.

Get the current short-term interest rates for the two currencies in the trade. Short-term interest rates are set by the central banks that control the supply of each currency. For the U.S. dollar, that's the Federal Reserve; for the euro, it's the European Central Bank. These rates are also readily available on FOREX websites. For this example, say the U.S. dollar's short-term rate is 4.5 percent and the euro rate is 3 percent.

Determine the lot size of the trade. The lot size is simply how many "units" of the base currency are involved in the trade. The base currency is the first currency listed in the pair -- the currency you've bought. The second currency, the one you sold, is the "counter currency" or "quoted currency." For this example, say you bought a standard lot of 100,000 units of U.S. dollars, or $100,000.

Multiply the lot size by the exchange rate and the interest rate of the base currency, expressed as a decimal. In this example, the math would be: 100,000 x 0.9532 x 0.045 = $4,289.40.

Divide the result by the number of standard days in a year. The interest rates used in the calculations are annual rates; this step reduces them to daily rates. Some brokers use 365 as their number of standard days, but others use 360, a holdover from the days before computers, when pretending that every year had twelve 30-day months made pencil-and-paper calculations much easier. In this example, say the broker uses 365. The math: $4,289.40/365 = $11.75. Since you have bought dollars and are holding them instead of settling, this is the interest you "get." It's your rollover interest credit.

Perform the same calculations, but this time use the interest rate for the counter currency. In this case: 100,000 x 0.9532 x 0.03 = $2,859.60 $2,859.60/365 = $7.83 This is the interest you "pay." It's your rollover interest debit.

Subtract your debit from your credit to obtain your rollover rate. In this example: $11.75 - $7.83 = $3.92. For this rollover, you will receive $3.92 in interest.

Tips

  • If the base currency's short-term interest rate is lower than the counter currency's rate, the result of the rollover calculations will be negative. In that case, you don't receive rollover interest. Instead, you pay it.
  • Your broker deposits rollover interest you receive in your FOREX trading account and subtracts from your account any rollover interest you must pay.
  • The bulk of FOREX trades take place among only seven currencies. Those currencies, and the central banks for each, are: the U.S. dollar, or USD (Federal Reserve); the Canadian dollar, or CAD (Bank of Canada); the Australian dollar, or AUD (Reserve Bank of Australia); the euro, or EUR (European Central Bank); the Japanese yen, or JPY (Bank of Japan); the British pound, or GBP (Bank of England); and the Swiss franc, or CHF (Swiss National Bank).

Warning

  • Rollover interest is separate from any profit you make (or loss you incur) from the currency trades themselves. You can collect rollover interest day after day and still end up losing money if the exchange rates change in the wrong direction while you have a position open.

Photo Credits

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