Overnight or Rollover tax

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When a Forex position moves from one Forex day to another, the so-called "overnight" or "rollover" applies. That is the transfer tax between one day to another. The two terms overnight and rollover are synonymous and have the same meaning. Why does this tax exist? The regulation of the currency market requires that the position is settled within two working days: this involves the real delivery of the currencies. For the leveraged speculative trade, what we do, there is no real currency delivery. To avoid physical delivery, all positions at the end of the Forex day close and re-open; in this way the delivery moves one day, which never happens. Rollover is applied to this process of closing and reopening, i.e. a tax which can be negative (the customer pays to the provider) or positive (the provider pays to the customer). When it is negative (fee), for us it is a cost, while the positive one (refund) represents a profit for us.

What does the overnight tax depend on?

A currency pair consists of two currencies. For the currency we sell we pay the interest, while for the currency purchased we collect the interest. Each currency has its own annual interest rate set by the central bank. Based on the interest rate difference between the two currencies, the overnight tax is formed. It has already been said that the tax can be negative or positive. If we buy the currency at a higher rate of interest, we gain while we lose if we buy the one with the lower interest rate.

Take for example the EUR/USD pair, with the interest rate for March 2019, when this text was written. The annual interest rate of the euro is 0.00%, while this value for the dollar is 2.50%. If we buy the pair, that is we buy the euro against the dollar (we sell the dollar), we pay 2.50% on the dollar sold, while we collect 0.00% on the euro purchased. In this case, the difference is against us. Otherwise, by selling the pair (we sell EUR and buy USD), the interest difference is positive and the rollover is in our favor. It seems that we pay or collect 2.50% per year, but this is not the case. Also in this case the Forex providers apply a kind of spread, of which the value is around 1%. This means that for the same pair of currencies the overnight fee is always greater then the overnight refund.

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Practical application

In the previous section we wanted to explain the concept and provide detailed information on what the rollover is. Let's briefly summarize the practical facts.

If the first currency of the pair (base currency) has a higher annual interest rate than the second currency (quotation currency):
- if we buy the pair, we earn (refund);
- if we sell the pair, we pay (fee).

If the first currency of the pair has a lower annual interest rate than the second currency:
- if we buy the pair, we pay;
- if we sell the pair, we earn.

What the customer really cares about are the effective values of the rollover interest. All platforms provide the table with interest values for all available pairs. Below is a table with some examples from February 2019. Daily taxes are expressed in US dollars for a position of 10,000 dollars. Positive values represent a gain for client and vice versa.

PairSellBuy
EUR/USD0,6274-1,2776
USD/TRY5,2815-6,0182
GBP/CAD-0,0010-0,7771
EUR/SEK-0,2848-0,3910
CAD/CHF-0,78200,3343
USD/SEK-1,07120,5011

In this table we see both the cases described above, where you earn by selling and you lose by buying, and vice versa. There is also a third case where you pay in both case, when you sell and when you buy. This happens when the difference between the interest rates is less than the value of "tax spread" applied by Forex platform, usually 1%. In the table for GBP/CAD and EUR/SEK fee is applied in both cases.

If we decide to invest 100 dollars to buy the EUR/USD pair, with leverage 10, the value of our position is $1,000. The tax is negative and is equal to -1.2776 dollars. Since the value in the table refers to $10,000, to calculate the tax we must proportion the two amounts: -1,2776x1,000/10,000 = -0,128 dollars. It means that for every change from one day to another, we have to pay 0.128 dollars; we have a daily loss for as long as the position remains open. If we sell the pair under the same conditions, we have a daily profit of 0.6274x1.000/10.000 = 0.063 dollars.

Usually, during the opening of the position the Forex platform we use indicates the amount of the overnight tax that will be applied. We also specify that the tax applies at 22:00 GMT (Greenwich Mean Time, England), at the end of the so-called Forex day. In most of European countries this coincides with 11.00 pm during the winter time period, and 12.00 pm during the summer time.

The weekend rollover

During the weekend, the triple tax applies, i.e. for Friday, Saturday and Sunday. It is interesting that some platforms apply this triple tax on Wednesday night instead of Friday night. Consult your operator's website to find this information.

How can the rollover tax be exploited?

Some traders base their strategy on this detail. The reasoning is simple: sooner or later you err the opening of a position, that is, the value goes in the unfavorable direction. Many traders "defend" the position to the bitter end and this means having to keep it open for a long time. If the position is such that it has a positive rollover something is earned every day: it is a kind of bond with the daily coupon. This is the reason why many traders invest only in positions with a positive interest.

Some might say that for 2% a year, this reasoning does not make much sense and that it is not worthwhile to condition one's actions in this sense. Attention, the percentage applies to the value of the position, not to the money invested. Since we invest with leverage, the percentage is multiplied. If the mentioned 2% multiply by the leverage 10, they become 20% and this already becomes an interesting gain.

In the above table we see that the USD/TRY pair (US dollar - Turkish lira) for the amount of 10,000 dollars, pays 5.2815 dollars for the short position (sale). This corresponds to an overnight interest rate of 100x5.2815/10,000 = 0.0528% per day. If leverage 10 is used, an incredible 0.0528x10x365 = 192% would be earned in one year. This is already extremely tempting, but you have to be careful. The Turkish lira in March 2019 had an annual interest rate of 24%, as inflation travels at very high levels. This means that the currency is weak and can have very high shocks. This possibility must also be taken into account.

The overnight tax is variable

At the end of this presentation, which we hope has been useful, another fact that must always be remembered. The overnight tax is variable and can change from today to tomorrow. A positive interest can become negative because the annual interest rate has changed for one of the currencies that compose the pair. This happens relatively often for pairs made up of currencies that have very similar interest rates.

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