ROLLOVER/PREMIUM
CALCULATION
Trades
placed by clients in the spot forex market
are settled in two days and open positions
held at time of rollover are automatically
rolled over by the clearinghouse to the next
settlement date. In simplest terms, the open
position is exchanged (swapped) for a new
position expiring the following settlement
date at 5pm EST rollover. This process is
also known as "tomorrow, next day"
or simply "tom next."
The
two positions that are exchanged during rollover
are generally not valued at the same price.
The difference in value is based on the difference
of overnight bank interest rates between the
two currencies traded.
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If
the trader is long the currency bearing the higher interest
rate then the trader should receive a small credit in
his account. Conversely, if the trader is short the
currency bearing the higher interest rate then the trader’s
account is debited. The nominal debit or credit is reflected
in the price of the new position assigned during rollover.
This is why you will notice a small difference in price
from the original position you had before rollover and
the new position assigned during rollover (depending
on whether you received a debit or credit).
Wednesday
rollover is used to compensate for Saturday and Sunday interest
that is unaccounted for while the markets are closed on those
two days. Any open spot positions held at rollover on Wednesday
will experience three days worth of credits or debits in the
account.
The
example below is for educational purposes only.
Rollover
or Premium example:
If you are long 100,000 EUR/USD at rollover, EUR/USD at rollover
is trading at 1.1800, EUR short-term interest rate is 2.25%
and the USD short-term interest rate is 4.00%, the theoretical
rollover calculation would be as follows:
Formula
Contract notional value x (base currency interest rate - quote
currency interest rate) / 365 days per year x current base
currency rate = daily rollover interest debit/credit
Therefore:
100,000 x (2.25% - 4.00%) / 365 x 1.1800 = daily rollover
interest debit/credit
Further: 100,000 x -1.75% / 365 x 1.1800 = -$5.66 rollover
debit to your account
Since
you are long a base currency (EUR) bearing a lower interest
rate than the quote currency (USD), you pay rollover or premium.
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