Forex For Beginners, Part 1
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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 5:00 pm Eastern Standard Time on the date of settlement day, and re-open 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 short-term 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 CAD/USD. 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.Source: Free Articles from ArticlesFactory.co
