Rollovers

Although there are some similarities between the currency market and other financial markets, one convention unique to the currency market is rollovers. A rollover can be defined as a transaction where an open position from one value date (settlement date) is rolled over into the next value date.

Value dates are determined by the individual currency pairs unique banking holidays in their countries. Rollover periods can be extended if there is a banking holiday on of those countries. Double value dates are used when no rollover is needed due to the bank’s temporary holiday closure. Two trade dates are settling for the same value date.

Rollovers are where interest-rate markets and forex markets crossover. Rollover rates are based on the difference in interest rates of the two currencies pairs traded. If a currency position is held overnight, the investor can expect to pay an interest expense or to be paid the gain depending on his market position.

The difference between the interest rates in two countries is known as the “interest-rate differential.” When the interest-rate differential is larger,  it has a greater impact from rollovers. When the interest-rate differential is narrower, it has a smaller impact from rollers.

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Typically, rollovers are automatically applied by the investor’s forex broker if an open position if held past the change in value date.

Rollover Calculation

Deposit rates yield actual cash returns. These cash returns are netted to make a net cash return. The net cash return is divided by the position size, giving the currency pips and therefore the rollover rate.

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