Forex Rollover Interest Rates

Learn to calculate Forex interest rates and understand how next day rollovers work in Forex trading

In Forex trading, the concept of ‘rollover’ is interesting and important. When a Forex position moves to the next delivery date, rollover comes into play. This can work to your advantage, or against you, depending on whether it adds a stream of profit or loss to your equity.

In the majority of currency trading positions, traders must close their positions within two days. Rollover extends the settlement date of an open position. When you opt for an extension of your open trade, you are closing your existing trade at the day’s closing rate and opening a new position the following trading day. This is otherwise known as tomorrow next.

Debits or credits for every position opened at 22:00 GMT will be reflected in your Alvexo trading account within an hour. There is no rollover on weekends, since the markets are closed on Saturdays & Sundays.

You should remember that banks – on the other hand – will charge you interest during this time. We apply three days of rollover on Wednesdays. There are no rollovers on holidays, but there is an added day of rollover two days prior to the holiday.

LIBOR and LIBID Interest Rates

The payment of interest is an everyday occurrence with Forex trading, and this Alvexo guide will show you precisely how to factor Forex interest rates into your daily trading regimen.

We will debit or credit your account with rollover interest for all open positions held after 22:00 GMT. At precisely 22:00 GMT all open positions will be extended and subject to rollover. I.e. a position that you opened at 21:59 GMT will be subject to rollover at 22:00 GMT while a position opened at 22:01 GMT will only be subject to rollover the next day.

The interest rates that we use are LIBOR/LIBID + mark-up. These are used by banks in the London interbank market where currencies exchange takes place. LIBOR is the London Interbank Offered Rate, which is set daily by the British Bankers’ Association; LIBID is the London Interbank Bid rate that banks will pay for foreign currency deposits  in the London Interbank market.

Cross Currency Interest Rate Swap Example

When you trade currencies, you are buying one currency and selling the other currency in the pair. There is also an interest component on purchased currency and an interest component on borrowed currency.

If we take the United Kingdom and the United States as a case in point, we can assume an interest rate of 0.50% per annum in the UK and an interest rate of 0.25% per annum in the US. If you decide to purchase one lot of GBPUSD, you are buying 100,000 units of the base currency (£100,000) and paying for it with the exchange rate applied to the quote currency.

Since you are buying GBP, you are earning an interest rate of 0.50% per annum on your pounds. Since you are selling USD, you are paying 0.25% interest on your borrowed US dollars. The amount that you gain per day is calculated as follows: (0.50% – 0.25%)/365 x 100,000.

This is the amount that will be credited to your Alvexo trading account per day if you leave your position open. If you go short on the currency pair, you will be debited that same amount per day.

Cross Currency Interest Rate Swap Example - © Alvexo
Cross Currency Interest Rate Swap Example – © Alvexo

Who Determines Interest Rates?

The role of Central Banks is to provide stability in the financial markets. This is accomplished by way of monetary policy measures. The Federal Reserve Bank sets the interest rate in the United States, the Bank of Japan sets the interest rate in Japan, the

Bank of England sets the interest rate in the United Kingdom, and the European Central Bank sets the interest rate in the Euro Area. Interest rates are important determinants of overall lending and savings rates in an economy.

When interest rates are high, people tend to put more of their money into fixed interest-bearing accounts. When interest rates are low, the cost of borrowing capital is typically cheaper.

Interest rates are especially important for Forex traders. During our courses on currency trading we have discussed the importance of interest rates on a country’s currency. With higher interest rates, the demand for a country’s currency will increase.

This is because there is more to be gained by exchanging one currency for another currency that earns a higher rate of interest. The demand for that second currency will increase, thereby strengthening its exchange rate in a basket of currencies.

The opposite is also true. The difference between the cost of borrowed funds and the interest rate generated by investing those funds can drive foreign exchange traders to make these positions.

Currency pairs are therefore one of the most significant and popular ways to invest in interest rate differentials between countries. For these reasons, it is imperative to stay ahead of developments that take place in the currency trading arena vis-a-vis interest rates.

We encourage you to enhance your understanding of the concepts laid out in this course by registering for a zero risk demo trading account.