What is forex rollover and swap?

In forex, trading rollover is the course of action that moves the settlement date to the next day. It is relating to the interest that is paid or received (swap) in respect of holding an open position during the night or to the next date.
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Settlement date is the payment date and the trading markets identify the time period between the transaction date and the settlement date. In forex trading, more often than not transactions are settled in two business days after the execution of a transaction. Rollover is a cutoff point of the day and necessary to determine the valuation for open orders with respect to the interest earned or lost (swap) and finance charges while using the margin account.

In the forex market, all trading positions that remained open till 5:00 pm Eastern Standard Time or not closed at the end of the day; these trading positions are carried forward automatically by the broker to the next day for settlement purposes. If a trader places trade after 5 p.m. ET during day 1, and closes the trade before 5 p.m. ET of day 2, then there is no rollover and interest / swap paid or owed.

Example
Let’s take an example for understanding the calculation of rollover interest (swap points):

A trader wants to buy EUR/USD currency pair. That means a trader is buying the Euro currency and selling or borrowing the US Dollar Currency. A trader has to pay interest on the borrowed currency that is US Dollar and he will earn the interest on the purchased currency i.e. Euro. The difference between the interest earned and paid is rollover profit or loss.

  • Pair = EUR/USD
  • Contract Value = 100, 000
  • EUR/USD Price = 1.2786
  • Euro interest rate per annum = 4.78%
  • USD interest rate per annum = 1.37%
Calculation Formula = Trade Value x (Bought / Base Currency Interest Rate – Sold / Counter Currency Interest Rate) ÷ (365 x Pair Price)
=100, 000 x (4.78% - 1.37%) ÷ (365 x 1.2786)
=100, 000 x 0.0341 ÷ 466.689
=7.3068 per day rollover profit

Thus, if the interest rate of the purchased currency is more than the interest rate of the sold currency, trader will make profit from the rollover (earn swap points). In case of the buying currency having a lower interest rate than the selling currency, trader will pay the rollover (swap points will be charged).

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