In forex trading, the term rollover denotes the interest which becomes applicable when forex positions are held past the end of a trading day.
Forex is traded on many exchanges. With New York, London and Tokyo hosting major forex exchanges, the full forex trading day now extends throughout the full 24-hours of a natural day. But because New York has long been the established center of the forex trade, the forex trading day officially ends with the close of New York exchanges at 5:00PM EST. The new trading day begins at the same time.
A standard forex contract has a term of one trading day. When you hold a forex position past 5:00PM EST, the contract is automatically renewed and rolled over to the new trading day. This is what is meant by the term rollover as used with regards to forex.
Important: There are some currencies which are not traded on the New York trading day. The trading day for the New Zealand dollar (NZD), for example, ends at 7:00AM NZDT (UTC+13).
Rollover is calculated based on the two interest rates paid or charged by the central banks which issue the two currencies in a currency pair. If the interest rate applicable to the base currency is higher than the interest rate applicable to the counter currency, the difference is paid out to the investor. If the interest rate of the base currency is lower than that of the counter currency, the investor must pay the broker the difference.
When the difference between a lower interest rate for a base currency and a higher interest rate for a counter currency is large, the rollover which the investor must pay can be significant. On the other hand, if the interest rate for the base currency is much higher than that of the counter currency, the rollover earned by the broker can be significant.
When very large positions bearing a positive rollover are held, the investor may earn substantial returns off the rollovers alone. When large positions with negative rollover rates are held – as may be the case when the base currency’s central bank charges a negative interest rate – the rollover can amount to a significant cost for the investor.
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