In the spot foreign exchange market, all trades must be settled in two business days. A rollover or swap refers to the process of closing the open position for today's value date and the opening of the same position for the next day's value date at a price reflecting the difference in interest rates between the two currencies.
In accordance with the international banking practices, Forex brokers automatically roll over all open positions to the next date at 17:00 (5 PM) EST for settlement.
Rollover involves exchanging the position being held for a position expiring the following settlement date. For example, for trades executed on Monday, the value date is Wednesday.
However, if a position is opened on Monday and is held overnight, the value date is now Thursday. The exception is a position opened and held overnight on Wednesday. The normal value date would be Saturday; because banks are closed on Saturday the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days worth of rollover interest (triple swap).
Trades with a value date that falls on a holiday will also incur or earn additional interest. Forex traders can earn interest on rollovers, depending on the direction of their positions and interest rate differential between the two currencies involved.
For instance, the primary interest rates in the United Kingdom are much higher than in Japan, so if a trader buys Great Britain pound (GBP) against the Japanese yen (JPY), the position will earn interest rate (positive swap) at 17:00 (5 PM) EST time on every weekday with a triple rate paid each Wednesday. On the other hand, if a trader sells GBP/JPY currency pair, the trade will incur a negative interest rate on the same time scale.
Overnight interest (rollover) is automatically paid to a client's account after buying a currency with a greater interest rate associated with its currency, and is automatically charged to a client's account if the country (or a monetary union in case of the euro) issuing this currency has lower main interest rate.
by Martin Maier
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