Forex Rollovers
In a forex transaction, you are basically long the base currency and short the quote currency. While settlement of the spot transaction is supposed to take place within two days, this does not happen because accounts are never fully funded and delivery is never actually contemplated. Accordingly, accounts are “rolled over” every night (usually at 4pm EST) which means that positions are closed and then re-initiated (if not closed out during the day). Some traders will offset their positions at 3:50pm EST to avoid this. Because you have one currency in an account (and are “borrowing” the currency that is sold), you should also receive interest on the currency in the account (and pay interest on the borrowed currency). The difference between the two interest rates (the interest rate differential) is deposited in the account and can affect performance.
As mentioned above, a spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction, or the rollover fee, is calculated by the difference in the interest rates that apply to the two currencies in the currency pair that you’re trading. If you buy a currency pair where the base currency has a higher interest rate, then you’ll receive interest, and vice versa. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.
→ EXAMPLE:
For a short position in 3 standard contracts ($300 000) in the EUR/USD:
14th June 2006 6:18 am : Buy: Rate 1.2542 : Counter amount 376 260 DB
14th June 2006 6:18 am : Sell: Rate 1.25425: Counter amount 376 275 CR
In this situation, the rollover fee as you can see is 0.5 pips, which is $5 per contract. Because we’re in 3 contracts, this is 1.5 pips or $15 for that day. Currently the trade is 31 pips in profit per contract (profit of $930).
Source: www.theforextrader.net
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