Trading Point debits or credits clients’ accounts, rollover interest at competitive rollover rates for all positions held open after 22:00 GMT.
In the forex market, all spot trades must be settled in two business days. Settlement implies physical delivery of currencies. However, physical delivery does not occur in margin trading. Therefore, all open positions must be closed every day at the end-of-day (set at 22:00 GMT) and re-opened the next trading day. This pushes out the settlement by another trading day.
This strategy, called a rollover, is created through a swap agreement and it comes at a cost or gain to the trader. In practice, Trading Point does not close and reopen open positions. Instead, it debits or credits clients’ trading accounts when they hold open positions overnight depending on prevailing interest rates (LIBOR/LIBID with an added mark-up).
How to calculate Rollover
Every currency trade involves borrowing one currency to buy another and interest is paid on the borrowed currency and earned on the purchased. Let’s assume that the interest rates in Japan and the US are 0.25% p.a and 2.5% p.a respectively. If you have a buy position of 1 lot in USDJPY at 118.50, then you earn 2.5% per year on your USD and pay 0.25% per year on your borrowed JPY.
Consequently, if you leave your position open you gain USD 6.16 per day [100,000* (2.5%-0.25%)/365]. This amount is credited to your account. This is equivalent to 0.73 pips per day [118.50* (2.5%-0.25%)/365]. Similarly, if you have a short position in USDJPY, you lose USD 6.16 per day. Rollover interest can thus provide an added stream of profit or loss to a client.
When is rollover booked?
22:00 GMT is considered the beginning and end of the forex trading day. Any positions that are open at 22:00 sharp are considered to be held overnight, and are subject to rollover. A position opened at 22:01 is not subject to rollover until the next day, while a position opened at 21:59 is subject to rollover at 22:00 GMT. A credit or debit for each position open at 22:00 appears on your account within an hour, and is applied directly to your account equity.
As the markets are closed on Saturdays and Sundays there is no rollover on these days but the banks still calculate interest on any position held over the weekend. To account for this procedure in the forex market is we apply 3 days of rollover on Wednesdays.