Trading Concepts

Rollover Rates

The most common costs associated with trading currencies are the spread and rollover rates.

The spread is the price you pay on each trade order you make.

When trading a currency you are borrowing one currency to purchase another. The rollover rate is typically the interest charged or earned for holding positions overnight. A rollover interest fee is calculated based on the difference between the two interest rates of the traded currencies.

Positions at a discount

If the currency you are buying has a higher interest rate than that which you are selling, you will earn rollover fees – this is referred to as a position being at a discount.

Positions at a premium

If the currency you are selling has a higher interest rate than that which you are buying, you will pay rollover fees. This is a position at a premium.

Example:

You’re trading EUR/NZD (Euro/New Zealand Dollar). The EUR has a low interest rate whereas the NZD has a relatively high interest rate. You are borrowing the high-rate currency to buy the low-rate one, so you are trading at a premium: you will pay rollover fees on this trade if held overnight. If you sell EUR (i.e. go short) to buy NZD, you will be trading at a discount and earn rollover rates on this trade.

Definition of ‘overnight’

Currency markets trade 24 hours a day through the working week, so ‘overnight’ is defined as holding the position at market close in New York – 5pm ET.

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