In the spot forex market, all trades must be settled in two business
days. A rollover refers to the process of closing 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 international banking practices, Forex
brokers automatically rolls over all open positions to the next date at 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 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 of interest.
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 Great Britain are
much higher than in Japan, so if a trader buys GBP, he/she will earn
interest at 5 PM EST time. on the other hand, if he/she sells GBP in
this currency pair, he/she will pay interest at 5 PM EST time.
Overnight Interest/Rollover is automatically paid to a client's
account after buying a currency with greater Interest Rate in its
country, and charged to a client's account if the country issuing this
currency has smaller Primary Interest Rates.
This article was by Martin Maier
http://www.fenixcapitalmanagement.com
No comments:
Post a Comment