A rollover is the process of keeping a position open beyond its expiry. The term is commonly used in forex, where it is used to explain the possible interest that may be earned or incurred for holding a position over night. However, rollover has a variety of meanings in finance.
In finance, the term rollover refers to the process of extending the due date of a loan, which usually incurs an additional fee. The extended due date on that loan will likely come with an increased borrowing cost, meaning that the loan would be more expensive to pay off when the new due date arrives.
For financial instruments like futures, a trader might roll over the expiry date of the contract to delay delivery of the assets to the next month – often when they do not want to take delivery of the physical asset itself. This is done to avoid incurring the associated costs and obligations of settling the futures contract.
A rollover in forex trading is the interest earned or paid for holding a currency position overnight. It is an opportunity for traders to either profit or incur a loss depending on their understanding of it. How traders earn money from a rollover is explained in the example below.
The way to calculate the interest that has been earned or that needs to be paid is by using the rollover rate, which works off the interest rate differential between the two currencies in a forex pair.
For instance, if the currency pair is EUR/USD, EUR is the base currency and USD is the quote currency – meaning you would be buying the euro and selling the US dollar.
If the EUR had an interest rate of 3% compared to 1% for the USD, you would be credited the interest rate differential of 2% a year (on an unleveraged trade). However, if the USD had a higher interest rate, you would be debited the interest rate differential.
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