Rollover Credit

What Is a Rollover Credit?

A rollover credit is a net payment of interest received by a forex trader who holds a long position on a currency pair overnight when the long currency pays a higher rate on interest than the short currency in the pair.

An overnight position in FX is one that does not close on the same day and is still open as of 5 p.m. EST. At 5:00 pm, the trader's account either pays out or earns interest on each position depending on the two currencies' underlying interest rates.

Understanding a Rollover Credit

A foreign exchange (FX) trader receives a rollover credit when they hold an open position in a currency trade due to the difference in the interest rates of the two currencies. If the interest rate on the currency pair held on the long side of the trade is greater than that of the interest rate on the short side currency, the trader will receive a rollover credit based upon the difference in the interest rates associated with the currency pair.

In forex, a rollover means that a position extends beyond the end of the trading day without being sold to close. Rollovers can result in either credits or debits to the trader's accounts, depending on which side of the trade they are holding long (bought) overnight.

Forex (FX) trades involve borrowing in one country’s currency to purchase another country’s currency, generally at the interest rates set by the central banks who issue those currencies. For trades held overnight, the seller of a currency will owe interest to the buyer of the currency at the settlement of the trade.

Note that most positions are rolled over on a daily basis until they close out or settle. Since FX markets trade 24 hours a day, five days per week, they arbitrarily chose 5 p.m. EST to be the close of a trading day. Therefore, any trade remaining open between 5:00 p.m. and 5:01 p.m. is subject to a rollover credit or debit. The FX market handles weekends by adding two additional days worth of rollover amounts to the trades held open by 5 p.m. Wednesday. Extra rollovers also typically occur two business days before major holidays.

How Rollover Credits Occur

Trades between two currencies with different interest rates and relatively stable exchange rates are known as carry trades, where traders expect to harvest a stream of rollover credits that outstrip any potential losses from fluctuations in exchange rates. If interest rates are the same on both currencies, the net rollover on both sides of the trade will cancel out. However, where rates differ, the trader will earn either a credit or a debit on the currency pair trade rollover.

Brokers automatically apply rollover credits or debits to traders' accounts. Some investors take advantage of this aspect of FX trading and try to increase their returns by earning interest with rollover credits.

Example of a Rollover Credit

An investor looking to make money via a rollover credit would look for a currency pair where the interest rate on the currency that trader holds is higher than the rate on the currency on the other end of the trade.

For example, a trader purchasing USD/JPY would buy U.S. dollars (USD) and sell Japanese yen (JPY). If the U.S. dollar’s interest rate was 2% and the yen’s interest rate 0.5%, the trader would receive pro-rata interest each day equal to a 1.5 percent annual percentage rate.