Rollover Debit

Rollover debit, in the context of foreign exchange trading, refers to a loss caused by an unfavorable difference in daily interest rates between the currencies being traded.

Essentially, a trader earns interest on the currency that has been loaned out, and pays interest on the currency that has been borrowed.  For positions that are held overnight, traders either gain or lose rollover interest. If the interest earned on the loaned currency is lower than the interest paid on the borrowed currency, the trader will have a rollover debit.

Rollover debit would affect an investor in a scenario such as the following. Currency trades occur in pairs, with traders using one currency to purchase another. Consider a forex trader who has has borrowed 100,000 euros and loaned U.S. dollars, represented as a currency pair by 100,000 EUR/USD.

In addition, suppose that the short term interest rate on euros is 3 percent and the rate on U.S. dollars is 2 percent. In such a case, the forex trader would be paying interest at 3 percent per year on the borrowed euros, but earning just 2 percent annually on the loaned U.S. dollars.

Typically, at close of trading at 5 p.m. Eastern Standard Time, Monday through Friday, a day trader's account either earns or loses money, depending on the currencies' interest rates. But with an overnight open position, held past 5 p.m., the forex trader is either credited or debited interest the next day based on the difference in the currency pair's rates.

In addition, suppose that the short term interest rate on euros is 3 percent and the rate on U.S. dollars is 2 percent. In such a case, the forex trader would be paying interest at 3 percent per year on the borrowed euros, but earning just 2 percent annually on the loaned U.S. dollars.

So rollover debit is the opposite of rollover credit, which refers to interest payments earned by a forex trader who has held an overnight long position on a currency pair.

The forex market is closed for business on weekends, though rollover values are still being calculated. "Typically, forex books an interest amount equal to three days of rollover on Wednesdays. Holidays during which the forex market is closed still provide a rollover valuation and are accounted for two business days in advance," according to FXCM, a retail foreign exchange broker.

It also explains that "one of the key aspects of calculating rollover for a currency trade is the interest rate attributed to each currency in the pair. As a point of reference, “target” interest rates are established exclusively by a country’s central bank for their domestic currency and released to the public. Target rates are widely viewed by short-term traders as ballpark estimates of the actual interest rates that will be used in determining the rollover value for a specific trade."

Forex brokers will usually roll over trades automatically. This is done to prevent speculative forex traders from having to pay real currency to the trader on the other end of the deal.

The settlement date, which is when a trader would need to deliver that actual currency to the other party, is two days after the transaction takes place. When brokers roll over positions, trades can be left open without any actual delivery of the full value of the currency position taking place. If rollover did not occur, the trader would be required to deliver the face value of the currency.