In this new guide we want to deepen what it is, how it works and how the rollover is calculated . In order to make forex newbies learn the meaning of rollover, we put in place the practice through the use of examples trying to propose them as easily as possible.
What is forex rollover?
In economic language, the term rollover indicates the process of extending the settlement date of an open position.
The date by which an executed security trade must be resolved. That is, the date by which the buyer must pay for the securities delivered by the seller.
In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. The cost of this process is based on the differential rate of two currencies.
Practical example of Rollover
All forex operations must be closed by 5pm US time, because this time is what we have defined above as the “settlement date”. If a position remains open after this time, it will be subject to rollover. Now the rollover, as we said, can have a negative and a positive value, but how do you know? Let’s calculate it!
Before moving on to the calculations, it is necessary to clarify that three parameters are required to perform this calculation: Number of units invested, respective interest rates of the currencies to be bought and sold.
So if the interest rate of the purchased currency is higher than the one sold then you will have a positive rollover. Otherwise there will be a negative rollover.
So let’s say you are buying USD / JPY at 111.50 (two standard lots) and close the position the next day. We know the interest rates of the dollar and the yen, respectively 3.5% and 0.15%, we just have to calculate the rollover according to the currency bought.
US $ 200,000 [(. 035-.0015) / 360] = US $ 18.61
Rollover: Explanation and calculation
Why 200,000? The number of units purchased is used because this is the number of shares owned, in fact, a standart lot is 100,000 units, since in our example, you had 2, that’s gone.
Why those badgers? Short-term interest rates are used because these are the interest rates on the currencies used within the currency pair.
What does the difference mean? The difference is calculated in order to define whether the rollover is negative or positive. Because as explained if, on the other hand, the short-term interest rate on the base currency is lower than the short-term interest rate on the borrowed currency, the rollover interest rate would be a negative number, causing a reduction in the value of the investor’s account.
Why split 360? 360 as the highlighted interest rate is paid every day. Since you held the position for one day, we need to divide by 360 (financial transactions are rounded to 360 days per year).
Now let’s calculate the rollover according to the currency sold
US $ 100,000 = 11,150,000 JPY per lot; 11,150,000 x 2 lots = 22,300,000
In conclusion, the rollover must be used with caution and always under the advice of your broker, because it is true that it can drastically raise the gain but at the same time and in the same way it can make it fall.
The lesson has come to an end and another forex concept, the rollover, has finally been acquired. You understand the importance of this term and the calculation that brokers make of it. It is therefore important, in choosing your best platform to trade, to keep an eye on this aspect as well. A recommended reading today? The detailed review on easyMarkets, one of the best forex brokers ever.