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A Guide to Understand the Forex Rollover

A Guide to Understand the Forex Rollover

A Forex rollover refers to a process by which an open position extends the settlement time. In many currency trading businesses, investors are required to take the delivery of their currencies two days after their transaction. But this rollover means you can close the current position simultaneously at the regular closing rate and re-join at a newer rate on the following day. This is how traders extend their settlement duration by a day.

We are here to make it simple for you by giving you an easier definition with examples. It is like commission paid for retaining a purchased currency position for a night. Every coin has an interbank interest rate, which can be gained overnight. Since traders always trade in this market with pairs, the deals don’t involve only two currencies, but also their two respective rates.

How does rollover work in Forex?

When there is an open position in Forex, it will pay or earn the variation in the interest rates of those currencies. These percentages are called currency or Forex rollover rates. The position will get a credit if the fee for retaining a currency for a long time is greater than for a shorter time. Similarly, the position also has to pay a debit when the interest fees of long-term retained currencies are lower than the shorter ones. Some of the central bank percentages are –

  • AUD – 1.50%
  • NZD – 1.75%
  • CAD – 1.75%
  • USD – 2.25 to 2.50%
  • GBP – 0.75%
  • EUR – 0%
  • MXN – 8%

Therefore, from this percentage chart, we can say that when anyone considers a long-term trade using EUR/USD pair, and if the overnight interest percentage of EUR is less than the USD’s overnight interest rate, then traders have to pay the difference. Note that the rollover charges might vary from broker to broker. To minimize your trading costs, browse this site and look at the trading conditions offered to the UK retail traders at Saxo.

If you are planning to retain a purchased financial instrument overnight, please keep an eye on the roll rates because they are important. During normal conditions, the fees come to a fixed point. When the interbank becomes quite stressed because of enhanced risk,  youcan see that the values are swinging dramatically.

How can you calculate the rollover rate?

To determine its value, a beginner needs these things –

  • Position size
  • Currency size
  • The interest fee of those currencies

Remember that the actual rollover always deviates a little because the bank percentages are regarded as the target ones, and it is the tradeable platform based on the condition of the prices.

For example,

The position size is 1,000, the currency pair selected is AUD/USD, the annual AUD rate is 1.5%, and the USD rate is 2.5%. Rollover cost is (AUD/USD 0.72).

So,

Earn (1,000 AUD x 1.5%) = 150 AUD per year, which means 150 / 365 = 0.41 AUD at the rollover rate. On the other hand,

Pay (7,2O0 USD x 2.5%) = 180 USD per year, which means, 180 / 365 = 0.493 USD.

Converting the AUD 0.41 interest percentage to the USD, we get = 0.41 x 0.72 = 0.296

By subtracting the money earned from money paid = (0.296O – 0.4932) = -0.1972 USD. This is the rollover cost. Similarly, if you find that the subtracted value is positive (+ve), it is a rollover gain.

Rollover and the advantages

Here are a few tips that can assist a newbie in taking advantage of this concept –

  1. Close the positions just before 5 PM (according to the ET) if you think that the value can possibly be negative.
  2. Leave the positions open if you notice that the value may be positive. We advise you to go on with this.
  3. Always keep a sharp eye on the percentages and calendar of the central bank. It will help beginners to monitor the fees, which may fluctuate.

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