Understanding Rollovers and Interest Rates

One market convention unique to currencies is rollovers.
A rollover is a transaction where an open position from one
value date (settlement date) is rolled over into the next value
date. Rollovers represent the intersection of interest-rate
markets and forex markets.

Currency is money, after all

Rollover rates are based on the difference in interest rates of
the two currencies in the pair you’re trading. That’s because

what you’re actually trading is good old-fashioned cash. When
you’re long a currency, it’s like having a deposit in the bank. If
you’re short a currency, it’s like having borrowed a loan. Just
as you would expect to earn interest on a bank deposit or pay
interest on a loan, you should expect an interest gain/expense
for holding a currency position over the change in value.
Think of an open currency position as one account with a pos-
itive balance (the currency you’re long) and one with a nega-
tive balance (the currency you’re short). But because your
accounts are in two different currencies, the two interest rates
of the different countries apply.
The difference between the interest rates in the two countries
is called the interest-rate differential. The larger the interest-
rate differential, the larger the impact from rollovers. The nar-
rower the interest-rate differential, the smaller the effect from
rollovers. You can find relevant interest-rate levels of the major
currencies from any number of financial-market Web sites.
Look for the base or benchmark lending rates in each country.

Applying rollovers

Rollover transactions are usually carried out automatically by
your forex broker if you hold an open position past the change
in value date.
Rollovers are applied to your open position by two offsetting
trades that result in the same open position. Some online
forex brokers apply the rollover rates by adjusting the aver-
age rate of your open position. Other forex brokers apply
rollover rates by applying the rollover credit or debit directly
to your margin balance.
Here’s what you need to remember about rollovers:
Rollovers are applied to open positions after the 5 p.m. ET
change in value date, or trade settlement date.
Rollovers are not applied if you don’t carry a position
over the change in value date. So if you’re square at the
close of each trading day, you’ll never have to worry
about rollovers.

Rollovers represent the difference in interest rates
between the two currencies in your open position, but
they’re applied in currency-rate terms.
Rollovers constitute net interest earned or paid by you,
depending on the direction of your position.
Rollovers can earn you money if you’re long the currency
with the higher interest rate and short the currency with
the lower interest rate.
Rollovers cost you money if you’re short the currency
with the higher interest rate and long the currency with
the lower interest rates.