Swaps

A rollover swap is the interest paid or earned for holding a position overnight; that is at exactly 5pm New York time. In the interbank market this is the time of ‘End of Day’ and the time when one ‘value date’ rolls to the next. In margin trading a position is left open until closed by you, so rollovers happen every evening on open positions.

If you have a position open on Wednesday evening it is rolled for 3 days to take into account the weekend.

A currency has an interest rate associated with it. In FX we trade in one currency against another so there are two interest rates involved. If the interest rate of the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover. If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover.

Another analogy is you put some GBP in the bank and earn 0.5% in interest. If you are in Australia and put AUD in the bank you earn 2.25%. Therefore you earn more money for having AUD than GBP.

If as a trader you buy 100,000 GBP vs AUD and you hold this position overnight you earn 1 days worth of interest on the GBP, but have to pay 1 days worth of interest on the AUD. Therefore you have ‘paid rollover’. Swaps can either be booked to your account by way of a cash amount when you close your position or a slight rate change is made to take the swap into account.

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