Rollover interest rate
Family IX · Macro
Not to be confused with exchange rate, floating exchange rate, inflation rate.
Rollover interest rate is the rate applied to the notional value of an open leveraged position when it is carried overnight, reflecting the difference between the interest rates of the two currencies involved plus any broker spread. It is credited when the trader is long the higher-yielding currency and debited when long the lower-yielding one. The exact cut-off time, the number of days charged, and the size of the markup vary by broker and instrument.[1]
How the rate is derived
The rollover interest rate is built from two components: the interbank interest-rate differential between the base and quote currencies, and the broker's own adjustment. For a long position, the trader effectively borrows the quote currency and holds the base currency, so the differential is positive when the base rate exceeds the quote rate. For a short position, the sign reverses. Brokers typically apply a markup that widens the spread between the credit and debit sides, and the resulting annualised percentage is converted into a daily cash amount.
The rate is not a single published figure. It changes as central-bank policy rates change and as the broker revises its markup, so the same pair can carry different rollover rates at different firms.
Worked example
Triple rollover and variations
Because spot foreign exchange settles on a two-business-day cycle, positions held over a weekend are usually charged or credited for three days at once. The day on which this triple rollover is applied is not the same at every broker and can shift around public holidays.
Other contract specifications also vary. Some brokers calculate rollover on the full notional value, others on the leveraged amount; some apply it at a fixed daily cut-off, others at the market close of a particular session. The rate quoted for a pair is therefore specific to the broker, the account type and the instrument.
Often confused with
- exchange rate
- The exchange rate is the price at which one currency converts into another, whereas the rollover interest rate is the cost or credit for holding a position overnight; the visible sign is that the exchange rate appears as a quoted price pair, while the rollover rate appears as a small percentage or cash adjustment on a position statement.
- floating exchange rate
- A floating exchange rate is a currency regime in which the market sets the price without a fixed peg, while the rollover interest rate is a financing charge tied to interest-rate differentials; the visible sign is that a floating exchange rate is described as a national policy arrangement, whereas the rollover rate is a line item on a trading account.
- inflation rate
- The inflation rate measures the change in the general price level of goods and services, while the rollover interest rate is the net financing adjustment on a leveraged currency position; the visible sign is that the inflation rate is reported as a consumer or producer price index change, whereas the rollover rate is quoted as a daily percentage or cash amount per lot.
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.