Roll over cost forex, also known as rollover interest, is a fee charged by brokers for holding open positions overnight in the foreign exchange market. It is the interest paid or earned for holding a position past the end of the trading day.
The foreign exchange market is open 24 hours a day, 5 days a week, with trading sessions starting in Sydney, moving to Tokyo, then to London and finally to New York. This means that a trader can keep a position open for several days, weeks, or even months. However, the longer a position is held, the higher the cost of maintaining it.
In forex trading, a position is the amount of a currency pair that a trader buys or sells. Traders can either buy a currency pair if they believe it will appreciate in value, or sell it if they believe it will depreciate. When a position is held overnight, it is subject to a roll over cost.
The roll over cost is calculated based on the interest rate differential between the two currencies in the pair. Each currency has its own interest rate set by its central bank. When a trader buys a currency with a higher interest rate and sells a currency with a lower interest rate, they earn interest. Conversely, when a trader buys a currency with a lower interest rate and sells a currency with a higher interest rate, they pay interest.
For example, if a trader buys the AUD/USD pair and holds it overnight, they will earn interest because the Australian dollar has a higher interest rate than the US dollar. Conversely, if a trader sells the AUD/USD pair and holds it overnight, they will pay interest because the US dollar has a higher interest rate than the Australian dollar.
The roll over cost is calculated by taking the difference between the interest rates of the two currencies and multiplying it by the notional value of the position. The notional value is the amount of the currency pair being traded.
Let’s say a trader buys 1 lot of the EUR/USD pair, which has a notional value of $100,000. The interest rate of the EUR is 0.25%, while the interest rate of the USD is 0.5%. The difference between the two interest rates is 0.25%. To calculate the roll over cost, we multiply the notional value by the interest rate differential and divide by 365 (the number of days in a year):
Roll over cost = (notional value X interest rate differential) / 365
Roll over cost = ($100,000 X 0.25%) / 365
Roll over cost = $68.49
This means that the trader will pay $68.49 for holding the position overnight.
It is important to note that roll over costs can be positive or negative, depending on the interest rate differential and the direction of the trade. If a trader buys a currency with a higher interest rate and sells a currency with a lower interest rate, they will earn interest. If they sell a currency with a higher interest rate and buy a currency with a lower interest rate, they will pay interest.
Roll over costs are also affected by swap rates, which are the rates at which banks lend and borrow currencies from each other. Swap rates are not fixed and can change depending on market conditions, which means that roll over costs can also vary from day to day.
In conclusion, roll over cost forex is the fee charged by brokers for holding open positions overnight in the foreign exchange market. It is calculated based on the interest rate differential between the two currencies in the pair and the notional value of the position. Roll over costs can be positive or negative, depending on the direction of the trade and the interest rate differential. It is important for traders to consider roll over costs when planning their trades and to monitor them regularly.
