Just as money held in a bank account overnight accrues interest, money held in a forex position overnight also accrues interest—or what in forex trading is called rollover.
Rollover is a consequence of the fact that every currency is associated with the interest rate of its country of origin. If the interest rate of a currency being bought is higher than the interest rate of a currency being sold in an overnight trade, the trader will earn positive interest payments, or positive carry.
However, if the interest rate of a currency being bought is lower than the rate of a currency being sold, then there will be negative carry, and the trader’s account will be charged the difference between the two rates. The rate of rollover accrual is based on the overnight interest rates paid by banks for the currencies being traded, and not on the country’s base interest rate.1)Retrieved 11 February 2017 http://www.nfa.futures.org/nfa-investor-information/publication-library/forex.pdf
Rollover is credited to accounts after 5 p.m. each day at the close of the trading hours. It will be credited for each day a position is held during the trading week and also as one day for any weekend periods. Forex trading has a two-day settlement period, which means rollover for the weekend is credited two days after the end of the weekend (on Wednesday). Rollover is not paid on holidays.2)Retrieved 11 February 2017 https://www.nfa.futures.org/NFA-compliance/publication-library/forex-regulatory-guide.pdf
Forex brokers will typically inform traders through their trading platforms of the amount of rollover they can expect to be paid or charged for holding a given position overnight.3)Retrieved 11 February 2017 https://www.nfa.futures.org/NFA-compliance/publication-library/forex-regulatory-guide.pdf
One important implication of rollover is that it can be used as a strategy to earn greater gains through a carry trade. In a carry trade, traders buy a currency to hold overnight in order to earn money with interest.
Currencies that are associated with high or low national interest rates can become particular targets for traders interested in profiting on interest rate differentials between countries. However, holding positions overnight may also involve greater risk, because traders may be exposed to larger price fluctuations or reversals over time.4)Retrieved 11 February 2017 https://www.hks.harvard.edu/fs/jfrankel/CarryTradeMilkenInReview.pdf
Rollover is an important factor to consider when trading forex. Rollover credits or debits to an account can significantly increase profits or costs of trading over time. Traders may want to calculate the amount of rollover interest they can expect to pay or earn before committing to overnight positions.
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|1.||↑||Retrieved 11 February 2017 http://www.nfa.futures.org/nfa-investor-information/publication-library/forex.pdf|
|2, 3.||↑||Retrieved 11 February 2017 https://www.nfa.futures.org/NFA-compliance/publication-library/forex-regulatory-guide.pdf|
|4.||↑||Retrieved 11 February 2017 https://www.hks.harvard.edu/fs/jfrankel/CarryTradeMilkenInReview.pdf|