Rollover

Rollover

icalThe Forex market is traded on a 2-day business value date. A new value date usually happens after 17:00 EST. So the rollover occurs when the settlement of one trade is rolled forward to the next value date (position or transaction is held overnight), with the cost of the interest rate differential between the two currencies.

For instance, if a trader opens one position on Monday and holds it until Tuesday, the value date will be Thursday.

Triple Rollover

However, if one trader opens a position on Wednesday and holds it until Thursday, the value date would of be Saturday, but since there are no markets on Saturday, the position is rolled forward to Monday. Gaining or paying three times the interest rate, this is called triple roll over.

Paying and Gaining Interest

[Table 4]

Example on rollover

A trader goes long USD/JPY at 111.50 (two standard lots, position opened before 17:00 EST). The position is closed the next day.

If Interest rates are:

US – 3.5%

Japan – 0.15%

Rollover calculated in USD

US$200,000[(.035-.0015)/360] = US$18.61

We use US$200,000 because we traded 2 contracts: 100,000 x 2 = 200,000

360 because the interest rate shown is paid over a daily basis. Since our trader only kept the position one day, we have to divide it by 360 (financial transactions are rounded off to 360 days per year).

Rollover calculated in JPY

US$100,000 = 11,150,000 JPY per lot; 11,150,000 x 2 lots = 22,300,000

360 because the interest rate shown is paid over a daily basis. Since our trader only kept the position one day, we have to divide it by 360 (financial transactions are rounded off to 360 days per year).

Interest rates by currency pairs as of November 2007

[Table 5]