Forex For Beginners Part 1

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How to
Calculate Rollover Interest

In the foreign exchange
market or forex market, rollover is a means of stretching the arranged clearing
date or what is known as the settlement date of an open position. Mostly, in
common currency trades, trades are to be completed in two business days. Traders
who want to stretch their positions with no intention of settlement must close
their positions before 500 pm Eastern Standard Time on the date of settlement
day, and reopen the positions the next trading day. This means rolling over
the position. This at the same time closes the existing positions at the daily
close rate and then comes into a new opening rate at the next trading day. This
actually means that the trader is indirectly extending the settlement day by
one more day.

This is also called
the tomorrow next strategy. It works in forex because many traders do
not want delivery of the currency they
buy but instead they intend to get more profit from fluctuating exchange rates.
Because rollovers extend the settlement by another two trading days, it may
cause a gain or a cost to the trader depending on the existing rates.

Apparently, rollover
is when an investor reinvests funds from a mature security into a new issue of
the same or a similar security. The investor is transferring the holdings of
one retirement plan to another without the agony of tax effects. A charge is
incurred by forex investors who extend their positions on the following
delivery date.

Rollover interest
is the net result of the money borrowed by an investor to purchase another
currency this interest is paid on the borrowed currency and earned on the
purchased currency. To calculate this, you should get the shortterm interest
rates of each currency, the existing exchange rate of the currency pair and the
number of the currency pair purchased. For instance, an investor possesses
15,000 CADUSD. The present rate is 0.9155, the short term interest rate on the
Canadian dollar base currency is 4.50 and the short term interest on the US
dollar quoted currency is 3.75, so the interest would be 33.66 15,000 x
4.50 3.75 365 x 0.9155.

If, however, the
short term interest rate on the base currency is lower than the short term
interest rate of the borrowed currency, the interest rate would result in a
negative number which may generate a slight loss in the investor account. This charge can be avoided by taking a closed
position on the currency pair. If an option that is about to expire is quite
favorable to grip, the investor can either buy or sell the later expiring
option. Always note the interest rate that is paid by a currency trader or any
that he may have received in the course of these forex trades is considered by
the IRS as ordinary interest income or expense. For tax purposes, the trader of
the currency should always keep track the interest received or paid separate
from regular trading gains or losses.