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 average rate of your open position. Other forex brokers apply rollover rates by applying the rollover credit or debit directly to your margin balance. In terms of the math, it’s six of one, half a dozen of the other.

Here’s an example of how the rollover of an open position would work under each model:

Position: Long 100,000 AUD/JPY at a rate of 90.15 for a value date of January 10

At 5 p.m. ET, the rollover takes place and the following rollover trades hit your account. (Remember: This is done automatically by most online brokers.)

You sell 100,000 AUD,/JPY at 90.22 for a value date of January 10. (This trade closes the open position for the same value date.)

You buy 100,000 AUD/JPY at 90.206 for a value date of January 11. (This trade reopens the same position for the new value date.)

The difference in the rates represents the rollover points. (90.22- 90.206 = 0.014, which is expressed as 1.4 points.)

If the rollover is applied to your average rate on the open position, your new average rate on the position is 90.136. (Here’s the math: 90.15 - 0.014 = 90.136.) Because you’re now long from a lower average price, you earned money on the rollover.

If the rollover is applied directly to you margin balance, the rollover points are multiplied by the position size (100,000 x 0.014 = JPY 1,400 earned) and converted into USD (JPY 1,400 ÷ 116.00 [the USD/.JPY rate] = $12.07) and added 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 reflect the interest rate return or cost of holding an open position.
• 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 will cost you money if you’re short the currency with the higher interest rate and long the currency with the lower interest rates.
• Rollovers can have spreads applied to them by some forex brokers, which can reduce any interest earned by your position.
• Rollover costs/credits are based on position size - the larger the position, the larger the cost or gain to you.
• Rollovers should be considered a cost of doing business and rarely influence overall trading decisions.

If you're going to be trading a relatively large account with an online forex broker (say, over $25,000 in margin deposited), you’ll probably be able to negotiate a tighter rollover spread with your broker. This will enable you to capture more of the gains if you’re positioned the right way, or to reduce your cost of carry if you’re not.