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Forex Rollover Rates

Forex Rollover Rates
The Cost of Holding Overnight Trade Positions

What Is Rollover Rate in Forex?

The net interest return accumulated on a currency position held overnight is known as forex rollover. It is also called swap rate. Every currency has an interbank interest rate associated with it and since currencies are traded in pairs, there are two different interest rates to consider here. Usually, a currency position that is left open after 5pm EST is subject to these interest rates.

Traders gain from positive rollover rates, while negative rollover rates can hurt the bottom line. This is why it’s important to understand the consequences of holding positions open overnight and develop trading strategies accordingly.

How Does it Work?

In an overnight position, the interest rate differential between the two currencies will influence the swap rate which will be added to the net results at 5pm EST. Credit may be earned as long as the long currency’s interest rate is higher than that of the short currency. Likewise, the account may be debited if the interest rate of the short currency is higher than that of long currency.

Currency interest rates are set by their nation’s Central Bank. For instance, the interest rate of the US Dollar (USD) is decided by the US Federal Reserve, while the European Central Bank does this for the Euro (EUR). Interest rate decisions are part of the monetary policies of Central Banks, through which they control domestic inflation, employment rates and overall economic growth.

The release of an important economic indicator, such as a nation’s interest rate, is usually met with market volatility. Traders need to keep track of these interest rate decisions to monitor when rollover rates might drastically fluctuate. This can be easily achieved by following the Forexzones economic calendar.

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Calculating Rollover for Forex Positions

The base and counter currencies determine the amount of rollover. In the EUR/USD pair, the base currency is the Euro, while the counter currency is the US Dollar. Here, the trader buys Euros and sells US Dollars. Now, let’s see what happens if this trader holds a long position overnight.

If the EUR has an interest rate of say 0.25%, compared to 2% for the USD, the trader’s account would be debited the 1.75% interest rate differential on an unleveraged trade. However, if the EUR had an interest rate higher than 2%, the trader’s account would be credited with the positive differential.

The published central bank interest rates are ballpark estimates for short term traders to calculate the actual value of rollover rates for forex positions. In practise, the actual interest rate applied to overnight positions is the spot rate for the currency pair, adjusted by a certain amount of “forward points.” These are a basis point adjustment to the exchange rate, primarily used to account for interest rate volatility.

Forexzones swap rates are calculated each day at 4.59pm EST / 11.59pm MT4 platform time (GMT+2). Rates are tripled on Wednesdays, to account for the weekend. The swap rate structure can be changed to take holidays into account.

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