Overnight Swaps / Rollover

What Is the Rollover Rate?

The rollover rate is the net interest return on a currency position held overnight by a trader. That is, when trading currencies, an investor borrows one currency to buy another. The interest paid, or earned, for holding the position overnight is called the rollover rate. A currency position that’s open after 5 p.m. EST will be held overnight.

KEY TAKEAWAYS

• Net interest return on a currency position held overnight by a trader.
• Positions that remain open after 5 p.m. EST are considered overnight.
• A positive rollover rate is a gain for the investor, while a negative rate is a cost.

The first currency of a currency pair is called the base currency, and the second currency is called the quote currency. Base and quote currency interest rates are the short-term lending rates among banks in the home country of the currency.

How to the Calculate Rollover Rate

Calculating the rollover rate involves:
Subtracting the interest rate of the base currency from the interest rate of the quote currency.
Dividing that amount by 365 times the base exchange rate.

Understanding the Rollover Rate

The rollover rate converts net currency interest rates, which are given as a percentage, into a cash return for the position. A rollover interest fee is calculated based on the difference between the two interest rates of the traded currencies. If the rollover rate is positive, it’s a gain for the investor. If the rollover rate is negative, it’s a cost for the investor.

A rollover means that a position is extended at the end of the trading day without settling. For traders, most positions are rolled over on a daily basis until they are closed out or settled. The majority of these rolls will happen in the tom-next market, which means that the rolls are due to settle tomorrow and are extended to the following day.

While the daily interest rate premium or cost is small, investors and traders who are looking to hold a position for a long period of time should take into account the interest rate differential. It is possible that over a period of time you could buy currency X and sell it at a lower rate and still make money, assuming the currency you owned was yielding a higher rate than the currency you were short.

Example of How to Use the Rollover Rate

Most exchange Exchanges display the rollover rate, meaning calculation of the rate is generally not required. But consider the NZDUSD currency pair, where you’re long NZD and short USD. The exchange rate as of Jan. 30, 2019, is 0.69. The NZD overnight interest rate per the country’s reserve bank is 1.75%. The USD federal funds rate is 2.4%. Thus, the rollover rate for NZDUSD is:

For a 100,000 position the long interest is 9.3 EUR, or 100,000 * 0.0093%. For the short NZD, the cost is 5.01 NZD or 100,000 * 1.67 * 0.003%. The EUR converted to NZD equals 15.53, or 9.3 * 1.67. Generally displayed in pips, the NZDUSD rollover rate is -0.0026% or 0.26 pips. On a 100,000 notional position, the rollover rate would be -2.6 NZD or -3.8 USD.

Rollover Rate vs. Swap Rate

The rollover rate is the cost of holding a currency pair overnight. The swap rate is the rate at which interest in one currency will be exchanged for interest in another currency—that is, a swap rate is the interest rate differential between the currency pair traded. The rollover rate can also be known as the swap fee.

Limitations of Using Rollover Rate

The difference between an investor’s calculated rollover rate and what a exchange. Exchange charges can vary based on what the exchange considers the short-term interest rate for the respective currencies.