Rollover is an interest rate differential that is applied to the trader’s account for holding a position overnight. The rollover gets applied to the account at 5PM Eastern Standard Time in the United States, but this is different for international brokers (usually mid-evening local time). Traders should note that a trade is considered to be held overnight if it is place anytime prior to the deadline. Whether it was executed one minute prior or 10 hours, the rollover will be applied.
The interest rate differential is either debited or credited to the account and factors on the benchmark interest rate within the two countries that use the underlying currency. Whether the account is debited or credited depends on whether the interest rate in the country’s currency the trader is short is larger than the base currency.
Traders must also note the position size and potential rollover, which can change from day-to-day, because this could either add or subtract from a position that is in- or out-of-the-money.
Example: a trader is long one lot of AUDCAD (A$ 100,000 base) at 1.3685. Australia’s benchmark rate is 2.5 percent, or a daily rate of .0061 percent. The benchmark rate for Canada is one percent, or .0027 percent. The trade will calculate the interest on each position:
100,000 x .0061 = $61 AUD; 100,000 x .0027 = $27 CAD. Subtract the two rates: $61 AUD – $27 CAD = $34/100,000, or $3.4 credit per for the trade.