Forex Swaps


What Is Rollover or Swap
in Forex?

In a nutshell, rollover is an interest fee paid or earned when a position is kept open overnight, after 5 pm ET. The rollover fee is based on two different interest rates since the currency pairs are backed by two different countries. The rollover rate is also known as a swap fee.


Why Are Rollover Fees Charged?

The Forex Exchange Market is a versatile market that allows you to speculate on the price of the currencies, without having to physically exchange or deliver the underlying currencies physically at a settlement date.

However, in the underlying market, spot Forex transactions are settled within 2 business days after the trade date. It means, if a financial institution buys EURUSD, they’ll receive euros two days after the execution, since that’s how long it takes to transfer funds between bank accounts.

As the forex market is based on spot contracts and allows leverage, the broker acts as a counterparty, rolling over your positions and calculating funding charges as a substitute of the delivery of the physical currencies. This means that if rollover didn't happen, traders would have to sell or buy your existing contract every 2 days.

In order to allow for a seamless trading experience, banks do this on traders’ behalf and charge the swap/rollover fee. To pass on this cost, swap fees are implemented. Its origin is in the Interbank Market, and the interest rates paid (to be financed) by the countries involved in the currency pair.

The swap fees depend mainly on the difference in the interest rate of both currencies in the pair, when these values are net off, you could be charged or receive a daily amount of interest depending on the position you hold.

If the long currency’s interest rate is higher than the sell currencies interest rate, the position will pay the position’s holder a swap credit. While the swap will be paid (debit), if the short currency’s interest rate is higher than the long currency’s interest rate. For example, if you open a long position on GBP/USD and the GBP interest rate is lower than the USD interest rate, you will pay a rollover fee.

It’s important to note that drastic changes in rollover rates in Forex only occur when there are changes in the countries economies involved in the pair that might increase the credit risk. However, for this reason, it doesn’t mean that a long position, that incurred swap earns today, won’t incur swap debits in the future.


How to Calculate Rollover Fees?

The rollover fees can be estimated based on the currency pair, position size and interest rate associated with each currency. For example:

Imagine a trader is going long on a 10k lot of EUR/USD at 1.08. Suppose the EUR annual interest rate is 1.5% and the USD annual interest rate is 2.5%. Based on this information, the daily rollover cost would be obtained by subtracting the short currency interest rate from the long currency interest rate, as the following:

- Gain 10,000 EUR X 1.5% = 150 EUR annually. EUR 150/365 = 0.4109 EUR at rollover daily
- Pay 10,800 USD X 2.5% = 270 USD annually. $270/365 = 0.7397 USD
- Convert the earned EUR interest rate 0.41095 to dollars. 0.41095*1.08 = 0.4438 USD
- Netting off the earned rate from the amount paid, the rollover cost is = 0.4438-0.7397 = -0.2959 USD.

It means that the trader would have to pay 0.2959 USD daily for holding a 10k lot of EUR/USD.


When Does Rollover Occur?

The rollover occurs everyday at 5:00 pm ET, if you open a position before 5:00 pm, your trade will be charged or paid rollover rate on that day. If you open the position after 5:00 pm ET, then the rollover rate will be applied to the open position the next day.

Is Rollover Charged on the Weekends?

During the weekends the financial markets are closed, so rollover fees are not being charged during these days. However, on Wednesday, there is a triple swap rate which simply accounts for three times the usual swap fee as a compensation for trade settlement that occurred during the weekend. Even if the trader doesn’t leave any positions open on the weekend, if a position is held on Wednesday after 5:00 pm, triple swap will incur.


How to Use Rollover in Your Favor

1. Bear in mind that if you hold a position past the market close, 5 pm ET, the price isn’t the only factor that position will be subject to interest rates. These rates can be positive or negative depending on the pair and direction you are trading. If you think you’ll be negatively impacted by the swap fees, mainly when trading crosses and exotics, it might be in your best interest to close your positions before rollover.

2. There are some trading strategies, like carry trade, that enable the use of rollover rates in traders' benefit, you can study more and apply them on your trading plan.

3. Watch the central bank's interest rates to find out more about what to expect about rollover rates.