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Rollovers represent the intersection of interest rate markets and forex markets. When an open position from one value date or settlement date is rolled over to the next value date or settlement date, this is known as Rollover in currency trading. Rollovers are unique to the currency markets.
Rollover rates depend on the difference between the interest rates of the two currencies in the pair that you are trading. Only remember that what you are trading is in fact the good old cash. Dont forget currency is money after all.
It is like having a deposit in a bank account when you are long on a currency. Its like take a loan from the bank if you are short. You should expect an interest gain or an interest expense on holding a currency position over time just as you would expect to earn interest on a bank deposit and pay interest on a loan.
The difference between the interest rates between the two currencies is called the interest rate differential. Think of the open currency position as one currency with the positive balance (the currency you are long) and one with negative balance (the currency you are short).
You should look for the base or benchmark lending rates in each country. The interest rates of two different countries apply because your accounts are in two different currencies. You can find the benchmark lending interest rates of different countries from any good financial website like the Wall Street Journal, the Financial Times, CNBC etc.
The larger the interest rate differential, the larger the impact from rollovers! The narrower the interest rate differential, the smaller the impact of the rollovers! Rollovers are usually carried out by your forex broker if you hold an open position past the settlement date.
Rollovers are applied to your open currency position by two offsetting trades that result in the same open position. Some online forex brokers apply the rollover rates by adjusting the average rate of your open position. Other forex brokers apply the rollover rates by applying the rollover credit or debit directly to your margin balance.
Day traders dont have to worry about rollovers. Rollovers do not apply for day traders who usually close their positions at the end of each trading day. Rollovers are not applied if you dont carry a position over the change in the value date. Rollovers only apply to your over night open position carried over to the next day. Rollovers are applied to open position after 5.00 PM EST change in value date.
Rollovers can earn you interest income if you are long the currency with the higher interest rate and short the currency with the lower interest rate. Rollovers will cost you money if you are short the currency with the higher interest rate and long the currency with the low interest rates.
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