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In Spot FX the majority of the time
the end of the business day is 21:59 (London time).
Any positions still open at this time are automatically
rolled over to the next business day, which again
finishes at 21:59.
This is necessary to avoid the actual
delivery of the currency. As Spot FX is predominantly
speculative most of the time the trades never wish
to actually take delivery of the currency. They
will instruct the brokerage to always rollover their
position.
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Many of the brokers nowadays do this
automatically and it will be in their polices and
procedures. The act of rolling the currency pair
over is known as tom.next, which stands for tomorrow
and the next day.
Just to go over this again, your broker
will automatically rollover your position unless
you instruct him that you actually want delivery
of the currency. Another point noting is that most
leveraged accounts are unable to actual deliver
of the currency as there is insufficient capital
there to cover the transaction.
Remember that if you are trading on
margin, you have in effect got a loan from your
broker for the amount you are trading. If you had
a 1 lot position you broker has advanced you the
$100,000 even though you did not actually have $100,000.
The broker will normally charge you the interest
differential between the two currencies if you rollover
your position. This normally only happens if you
have rolled over the position and not if you open
and close the position within the same business
day.
To calculate the broker's interest
he will normally close your position at the end
of the business day and again reopen a new position
almost simultaneously. You open a 1 lot ($100,000)
EUR/USD position on Monday 15th at 11:00 at an exchange
rate of 0.9950.
During the day the rate fluctuates
and at 22:00 the rate is 0.9975. The broker closes
your position and reopens a new position with a
different value date. The new position was opened
at 0.9976 - a 1 pip difference. The 1 pip deference
reflects the difference in interest rates between
the US Dollar and the Euro.
In our example your are long Euro
and short US Dollar. As the US Dollar in the example
has a higher interest rate than the Euro you pay
the premium of 1 pip.
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Now the good news. If you had the
reverse position and you were short Euros and long
US Dollars you would gain the interest differential
of 1 pip.
If the first named currency has an overnight
interest rate lower than the second currency then
you will pay that interest differential if you bought
that currency.
If the first named currency has a
higher interest rate than the second currency then
you will gain the interest differential. |
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To simplify the above. If you are
long (bought) a particular currency and that currency
has a higher overnight interest rate you will gain.
If you are short (sold) the currency with a higher
overnight interest rate then you will lose the difference.
I would like to emphasis here that
although we are going a little in-depth to explain
how all this works, your broker will calculate all
this for you. The purpose of this book is just to
give you an overview of how the forex market works.
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