Overnight financing
Family IV · Costs
Not to be confused with swap, rollover interest rate, interest rate.
Overnight financing is the cost of keeping a leveraged position open through the daily rollover point, when the trade is effectively re-opened for the next value date. It is derived from the interest-rate differential between the two currencies involved, adjusted by the broker's own spread or markup. The charge can be positive or negative depending on direction and rate levels.[1]
How the charge is built
Each currency in a pair carries a short-term reference rate set by its central bank or money market. Going long the higher-yielding currency and short the lower-yielding one normally produces a positive carry; the reverse produces a cost. The broker then applies a markup, often expressed as an annual percentage or a fixed points-per-lot figure, and may apply a triple charge on one weekday to cover the weekend value date.
Because reference rates change, the financing charge is not fixed for the life of a position. It is recalculated at each rollover using the prevailing rates and the broker's current markup.
Worked example
If the rate were negative, the same calculation would produce a credit rather than a charge. The exact rate, markup and rollover time vary by broker, instrument and account type.
Practical points
- Financing is typically applied at a set rollover time, commonly around 22:00 GMT, though this varies by broker and instrument.
- Positions opened and closed before rollover avoid the charge; those held through it incur it.
- Triple financing on one weekday is a common convention to account for the weekend, but the day and the multiplier are broker-specific.
- Financing applies to leveraged products such as CFDs and rolling spot positions; futures and options price carry into the contract itself.
Often confused with
- swap
- A swap is an overnight financing charge or credit applied to a leveraged position, calculated from the interest rate differential between the two currencies and the broker's markup, and posted to the account when the position is rolled past the daily cut-off.
- rollover interest rate
- The rollover interest rate is the net amount credited or debited when a leveraged position is held past the daily cut-off, calculated from the interest-rate differential between the two currencies and the broker's markup.
- interest rate
- The interest rate is the percentage of a principal amount charged or paid for the use of money over a period, typically expressed as an annual percentage and set by central banks, interbank markets, or individual lenders.
See also
References
- ↑ Policy rate publications of the relevant central banks. Overnight financing follows the interest-rate differential between the two currencies, plus the broker's own markup, so the figure is not fixed.