In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date.
However, by rolling over the position – simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day – the trader artificially extends the settlement period by one day.
A forex rollover should not be confused with a retirement account rollover.
Key Takeaways
- A rollover in forex markets refers to moving a position to the following delivery date, in which case the rollover incurs a charge.
- Depending on whether a trader has a long or short position, they may receive a rollover credit or else owe a debit.
- The rollover rate in forex is the net interest return on a currency position held overnight by a trader.
Rolling Over FX Positions
Long-term forex day traders can make money in the market by trading from the positive side of the rollover equation. Traders begin by computing swap points, which is the difference between the forward rate and the spot rate of a specific currency pair as expressed in pips. Traders base their calculations on interest rate parity, which implies that investing in varying currencies should result in hedged returns that are equal, regardless of the currencies’ interest rates.
Traders compute the swap points for a certain delivery date by considering the net benefit or cost of lending one currency and borrowing another against it during the time between the spot value date and the forward delivery date. Therefore, the trader makes money when he is on the positive side of the interest rollover payment.
Rollover Credit and Debit
Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy; rather, they want to profit from changes in the exchange rates. Since every forex trade involves borrowing one country’s currency to buy another, receiving and paying interest is a regular occurrence. At the close of every trading day, a trader who took a long position in a high-yielding currency relative to the currency that they borrowed will receive an amount of interest in their account.
Conversely, a trader will need to pay interest if the currency they borrowed has a higher interest rate relative to the currency that they purchased. Traders who do not want to collect or pay interest should close out of their positions by 5 P.M. Eastern.
Note that interest received or paid by a currency trader in the course of these forex trades is regarded by the IRS as ordinary interest income or expense. For tax purposes, the currency trader should keep track of interest received or paid, separate from regular trading gains and losses.
Example of a Rollover
Most forex exchanges display the rollover rate, meaning calculation of the rate is generally not required. But consider the NZD/USD currency pair, where you’re long NZD and short USD. The exchange rate in early 2022 was is 0.69. The NZD overnight interest rate per the country’s reserve bank is 1.75%. The USD federal funds rate is 2.4%.
For a 100,000 position the long interest is 9.3 EUR, or 100,000 * 0.0093%. For the short NZD, the cost is 5.01 NZD or 100,000 * 1.67 * 0.003%. The EUR converted to NZD equals 15.53, or 9.3 * 1.67. Generally displayed in pips, the NZDUSD rollover rate is -0.0026% or 0.26 pips. On a 100,000 notional position, the rollover rate would be -2.6 NZD or -3.8 USD.
What Is the Rollover Rate in FX?
The rollover rate in forex is the net interest return on a currency position held overnight by a trader. This is paid because an forex investor always effectively borrows one currency to sell it in order to buy another. The interest paid or earned for holding such a loaned position overnight is called the rollover rate.
What Is a Rollover Credit vs. Debit?
A rollover credit is received by a currencies trader when they maintain an open position in a currency trade overnight that involves being long a currency with a higher interest rate than the one sold. A rollover debit, on the other hand, is paid out by the trader when the long currency pays the lower interest rate.
From What Times Are FX Rollovers in Effect?
In forex, a rollover means that a position extends at the end of the trading day without settling. Most forex trades roll over daily until they close out or settle. The rollovers are conducted using either spot-next or tom-next transactions.
If a trader entered into a position on Monday at 4:59 p.m. EST and closes it on the same Monday at 5:03 p.m. EST, this will still be considered an overnight position, since the position was held past 5:00 p.m. EST, and is subject to rollover interest.