What is Forex Rollovers: A detailed guide about rollover
In forex jargon, rollover refers to a deliberate attempt by the trader to extend the settlement date of the currency exchange. A forex rollover is carried out with the intention of earning a greater volume of profits either through interest or as a result of a change in the currency value.
How a Forex Rollover is Carried Out
Forex rollover is a successful strategy to increase profits because most traders do not physically exchange the currency pairs in which they trade. In practical terms, a trader has to collect the currency in physical form two days after the position's closing. To engage in rollovers, the trader closes the existing position at the close rate of that day. As the trade is not physically closed at the forex market, it calls for a re-entering with the opening rate on the next trading day. Thus, the trader is able to extend the settlement date by one day.
What are the Benefits of Forex Rollovers?
Forex rollovers are beneficial, as traders taking a long position can earn interest on the currency pair's value. To understand the concept of interest, you should know that buying/selling of currencies in the forex market attracts interest. At the closing rate of the trading day, the trader, who rolls over the position involving purchasing a high-yielding currency with the currency he has borrowed, will receive proportionate interest in his account. Contrary to this, if the currency borrowed by the trader has a higher value, he has to pay the interest.
Thus, traders who do not understand the concept of rollovers close their positions by 5 pm ET. Moreover, the interest earned as rollovers is subjected to tax as per the income tax laws. Therefore, a trader should keep a record of rollover interest earned for future reference.
Formula for the Rollover Rate (Forex)
Rrollover= (Rbase currency−Rquote currency)/365∗ E
Where:Rrollover=the rollover rate
Rbase currency=the interest rate for the base currency
Rquote currency=the interest rate for the quote currency
E=the exchange rate
