Rollover Rate (Forex): Overview, Examples, and Formulas

What Is the Rollover Rate (Forex)?

The rollover rate is a trader’s net interest return on an overnight currency position. In currency trading, the buyer uses a loan of one currency to pay for the purchase of another. The rollover rate refers to the interest rate at which the position is held overnight. After 5 p.m. EST, a currency position will be kept overnight.

MAIN POINTS

A trader’s overnight interest gain or loss on a currency position

Any orders not filled by 5 p.m. EST the following day are deemed overnight.

For investors, a positive rollover rate means profit, whereas a negative rate means a loss.

The formula for the Rollover Rate (Forex)

R reinvestment = 365 * E * R base currency * R quote currency

where:

Rate of a rollover, or R rollover

The interest rate on the base currency, denoted by “R,”

Interest Rate in Quote Currency =R quote currency

E = The Rate of Exchange

“Base currency” refers to the first currency in a currency pair, whereas “quote currency” refers to the second currency. Short-term loan rates between banks in the currency’s native nation constitute the “base” and “quote” interest rates.

How to Calculate the Rollover Rate (Forex)

To determine the rollover percentage, one must:

• I am finding the difference between the interest rates of the base currency and the quote currency by subtracting one from the other.
• By dividing by 365 multiplied by the starting exchange rate.

Understanding the Rollover Rate (Forex)

• The rollover rate is the proportion by which a position’s net currency interest rate is converted into cash. The spread between the interest rates of the two currencies exchanged is the rollover interest charge. If the rollover rate exceeds zero, the investor has made a profit. Conversely, the investor will lose if the rollover rate is less than zero.
• A rollover carries a trade-over from one trading day to the next without closing the position. Every day, traders roll over their open positions until they are finally closed or settled. The bulk of these rolls will take place in the tomorrow market, which implies that the settlement dates of rolls initially scheduled for tomorrow will be pushed back one day.
• Investors and traders planning to keep a position for an extended length of time should consider the interest rate difference, even though the daily premium or cost is little. For example, if the currency you own yields more than the currency you are short, then it is feasible that you may acquire currency X and sell it at a lower rate over time and still earn money.

An Illustration of How to Make Use of the Rollover Rate in Forex

• The rollover rate is often shown by currency exchangers, eliminating the need to calculate it. Nevertheless, consider the NZDUSD pair, where you would be long New Zealand dollars and short U.S. dollars. As of the 30th of January 2019, the exchange rate was 0.69. The Reserve Bank of New Zealand has set the overnight interest rate at 1.75 percent. The U.S. dollar federal funds rate is 2.4 percent. Thus, the NZD/USD rollover rate is:
• The prevailing long interest rate on a position of 100,000 EUR is 9.3 EUR (or EUR 9.30). The cost of borrowing New Zealand dollars is $5.01 (or 100,000 x 1.67 x 0.003%). Therefore, 15.53 New Zealand dollars may be obtained by exchanging 9.3 euros. The current rollover rate for the NZD/USD currency pair is -0.0026% or 0.26 pips. Therefore, the rollover rate is -2.6 New Zealand dollars, or -3.8 US dollars, on a 100,000 notional stake.

Rollover Rate (Forex) vs. Swap Rate

Keeping a currency pair overnight incurs a cost that is reflected in the rollover rate. Swap rates are the interest rate difference between the two currencies being swapped; they are the rate at which one currency’s interest will be exchanged for interest in the other. The swap charge is another name for the rollover rate.

Limitations of Using Rollover Rate (Forex)

The short-term interest rate for each currency on the forex exchange might affect the spread between the rollover rate an investor calculates and the rate the exchange charges.