# How do I Calculate Rollover Interest?

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This is a brief look at how to calculate rollover interest.

What is a rollover? In forex trading terms, a rollover is a move in which a trading position is left open until the next settlement date, in which case, a charge is incurred on that position based on the interest rate differential on the two currencies in the currency pair being traded.

If the trader is long on the currency with the higher interest rate, the net rollover interest earning will be positive and will be added to the monetary value of the active trade. If the trader is long on the currency with the lower interest rate, the net rollover interest earning will be negative and will be deducted from the monetary value of the active trade.

The premise of the concept of rollover interest simply stems from the fact that currencies are traded in pairs and different countries maintain different interest rates. Rollover interest has been the basis of carry trades in the forex market for a long time. Given that Japan has maintained a near zero interest rate at a time when countries like Australia and New Zealand had interest rates that were approaching 8.25%, rollover interest trading in Yen crosses became very popular, and approached a peak just before the global financial crisis caused the major central banks to perform coordinated interest rate cuts to stimulate the global economy.

How to Calculate Rollover Interest

Three parameters must be known to the trader in order to calculate rollover interest.

-          The amount of the currency being purchased (the trade volume or lot size).

-          The short term interest rates of both currencies in the currency pair.

-          The exchange rate of the currency pair (or the price quotes).

Example

In this example, we shall illustrate how to calculate the rollover interest swap on a long trade of two currencies with significant interest rate differentials. Let’s assume a trader we shall call Jack Lee decides to enter a BUY trade for the AUD/USD. Presently, the Reserve Bank of Australia’s (RBA) interest rate is 4.75% while that of the US Federal Reserve is 0.25%.

He buys 0.5 lots for a long order on AUD/USD. What is the rollover interest earning on this trade?

·         1 pip = \$5 for 0.5 lots; trade position controls \$50,000

·         AUD/USD = 1.0466

Daily rollover interest rate can be calculated as the product of the trade size (\$50,000)  and the interest rate of the long currency minus interest rate of the short currency (4.75 – 0.25), divided by the product of the number of days in a year and exchange rate.

This translates to:

[{50,000 X (4.75% – 0.25%)}] / (365 X 1.0466) = \$588.99

If the interest rates are unchanged, Lee will make an extra \$588.99 on a long trade rollover interest rate. If Lee was short on the AUD/USD then the sum of \$588.99 will be deducted from his account or from the position.

This in a nutshell, is how to calculate rollover interest swaps.

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