Rollovers in Forex

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 a Rollover in forex trading. Rollovers are unique to the forex markets.Keep this in mind what you are trading is in fact the good old cash. Currency is money after all. So when you talk of money, interest rates naturally come into play. Rollover rates depend on the difference between the interest rates of the two currencies in the pair that you are trading.You should expect an interest gain/expense on holding a currency position over time. It is similar to earning interest on a bank deposit and paying interest on a loan. It is like having a deposit in a bank account when you are long on a currency. It’s like take a loan from the bank if you are short.Interest rate differential is the difference between the interest rates between the two currencies. You should 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.If you hold an open position past the settlement date or value date, rollovers are usually carried out by your forex broker. The smaller the impact of the rollovers, the narrower the interest rate differential! The larger the impact from rollovers, the larger the interest rate differential!Some online forex brokers apply the rollover rates by applying the rollover credit or debit directly to your margin balance. Other forex brokers apply the rollover rates by adjusting the average rate of your open position. Rollovers are applied to your open currency position by two offsetting trades that result in the same open position.Day traders don’t 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 don’t 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.If you are short the currency with the higher interest rate and long the currency with the low interest rates, rollovers will cost you money. If you are long the currency with the higher interest rate and short the currency with the lower interest rate, rollover can earn you interest income.