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Rollovers in Forex
by Mark Mc Rae
Surefire Forex Trading
Even though the mighty US dominates many markets, most of Spot
Forex is still traded through London in Great Britain. So for
our next description we shall use London time. Most deals in
Forex are done as Spot deals. Spot deals are nearly always due
for settlement two business days later. This is referred to as
the value date or delivery date. On that date the counter
parties theoretically take delivery of the currency they have
sold or bought.
In Spot FX the majority of the time the end of the business
day is 21:59 (London time). Any positions still open at this
time are automatically rolled over to the next business day,
which again finishes at 21:59.
This is necessary to avoid the actual delivery of the
currency. As Spot FX is predominantly speculative most of the
time the traders never wish to actually take delivery of the
currency. They will instruct the brokerage to always rollover
their position.
Many of the brokers nowadays do this automatically and it will
be in their policies and procedures. The act of rolling the
currency pair over is known as tom.next, which stands for
tomorrow and the next day.
Just to go over this again, your broker will automatically
rollover your position unless you instruct him that you
actually want delivery of the currency. Another point noting
is that most leveraged accounts are unable to actually deliver
the currency as there is insufficient capital there to cover
the transaction.
Remember that if you are trading on margin, you have in effect
got a loan from your broker for the amount you are trading. If
you had a 1 lot position you broker has advanced you the
$100,000 even though you did not actually have $100,000. The
broker will normally charge you the interest differential
between the two currencies if you rollover your position. This
normally only happens if you have rolled over the position and
not if you open and close the position within the same
business day.
To calculate the broker's interest he will normally close your
position at the end of the business day and again reopen a new
position almost simultaneously. You open a 1 lot ($100,000)
EUR/USD position on Monday 15th at 11:00 at an exchange rate
of 0.9950.
During the day the rate fluctuates and at 22:00 the rate is
0.9975. The broker closes your position and reopens a new
position with a different value date. The new position was
opened at 0.9976 - a 1 pip difference. The 1 pip deference
reflects the difference in interest rates between the US
Dollar and the Euro.
In our example your are long Euro and short US Dollar. As the
US Dollar in the example has a higher interest rate than the
Euro you pay the premium of 1 pip.
Now the good news. If you had the reverse position and you
were short Euros and long US Dollars you would gain the
interest differential of 1 pip. If the first named currency
has an overnight interest rate lower than the second currency
then you will pay that interest differential if you bought
that currency. If the first named currency has a higher
interest rate than the second currency then you will gain the
interest differential.
To simplify the above. If you are long (bought) a particular
currency and that currency has a higher overnight interest
rate you will gain. If you are short (sold) the currency with
a higher overnight interest rate then you will lose the
difference.
I would like to emphasise here that although we are going a
little in-depth to explain how all this works, your broker
will calculate all this for you. The purpose of this article
is just to give you an overview of how the forex market works.
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