What Are Rollover Fees?
Rollover Fees Definition
Rollover fees are fees charged by brokers to investors when a forex position is held open overnight. The fee works out as the net interest return on a currency position held overnight by a trader.
Rollover fees are also referred to as a swap. A forex swap is the interest rate differential between the two currencies traded. This fee is calculated whether one holds a long or short position. Continue reading to learn more about rollover fees, how they work, and what they mean for retail investors.
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Rollover Fees Explained with Examples
A rollover fee or rollover rate in forex refers to the net interest return on a currency position held overnight by a trader. The fee is determined through the differences between the two currencies being traded. The first currency of a currency pair is referred to as the base currency, and the second currency is referred to as the quote currency.
Thus, if a trader were bullish on EUR/JPY, the Japanese Yen would be the quote currency, and the Euro would be the base currency.
The term rollover is used across finance and refers to the process of extending the due date of payment, such as a loan, which usually incurs a fee. Rollover fees or rates refer to the interest potentially earned or paid for holding a position overnight within forex trading.
As explained by Pacific Union, if the currency bought has a higher interest rate than what you are selling, a trader would typically ‘earn rollover fees.’ By contrast, if the currency being sold has a higher interest rate than the currency being bought, a trader would ‘typically pay rollover fees.’ This is seen in an example given below on a EUR/NZD trade (Euro/ New Zealand Dollar):
Traditionally the EUR has a lower interest rate than the NZD. A trader borrowing the higher-rate currency (NZD) to buy the low-rate one would be trading at a premium, meaning they would pay rollover fees.
By contrast, if a trader opened a short position on EUR to buy NZD, they would be trading at a discount and earn a rollover rate on this trade. [1]
It is important to note that the rollover fee is calculated from the previous days close. Exante, a trading platform, calculates these fees at ’15:00 GMT on weekdays,’ while weekend rollovers are calculated on Wednesday.’ They calculate the fee as ‘(current notional value x *rate* days)/ 360.’ [2]
How do You Calculate Rollover Fees
The formula to determine the rollover rate on a forex trade is shown below (Asterisk= multiplication):
R = (IRB - IRQ)/365*E, where:
R = The Rollover Rate
IRB = Base Currency's Interest Rate
IRQ = Quote Currency's Interest Rate
E = Exchange Rate
To determine the rollover fee, a trader should:
Subtract the base currency’s interest rate from the quote currency’s interest rate.
Then, they should divide that amount by 365 multiplied by the base exchange rate.
Put simply; a rollover fee refers to the cost of holding a currency pair overnight. The swap rate refers to the rate at which interest paid on a currency will be exchanged for another. The rollover rate can also be referred to as the swap fee. An example of determining a swap rate is given below:
Imagine you have opened a short position of EUR/USD (Euro/ US Dollar) with a Euro account. Following the formula:
(interest rate differential) = (Pip Value * Swap Rate* Number of Nights)/ 10.
If the pip value was $10 and the swap rate was 0.54, the swap/rollover fee would work out as:
(10* 0.54* 1)/ 10= $0.54
Beyond forex, overnight fees are commonly charged to investors who trade CFDs and hold leveraged positions. As Etoro explains, these fees are ‘essentially an interest payment to cover the cost of the leverage that a trader uses overnight.’ They are pertinent across the industry and ‘reflect the forces of supply and demand driving the market.’ [3]
Alternative Names: Rollover Rate, Overnight Fees, Fees, Swap.
What does it Mean for Retail Investors?
Understanding the associated costs and potential gains a forex trader can incur through trading is valuable for any retail investor. Rollover fees are an essential consideration for retail investors. Brokerages across the investment industry profit and incur losses due to these fees. Understanding how they work, how to work out one’s rollover fees, and their potential impact on trades is valuable knowledge for any trader or investor.
Beyond forex trading, rollover is a phrase commonly used within finance, and the concept of rollover fees can be taken and used across the world of investment and personal finance. Indeed, trading leveraged positions can incur overnight fees for investors. Gaining a good understanding of how rollover fees work and how they could impact your trading can only strengthen your experience and know-how as a successful investor.
Article Sources
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[1] Pacific Union. “What is rollover rates.” Accessed October 7, 2021.
[2] Exante. “How EXANTE calculates rollovers.” Accessed October 7, 2021. [3] Etoro. “What are overnight fees?” Accessed October 7, 2021
