Forex for Beginners. 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.
2. INVEST FOREX WITH ONLY 25$
CLICK HERE
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
3. 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 $33.66 [{15,000 x (4.50% -
3.75%)} / (365 x 0.9155)].
4. If, however, the short term interest rate on the
base currency is lower than the short term interest
rate of the borrowed currency, the interest rate
would result in a negative number which may
generate a slight loss in the investor account.
This charge can be avoided by taking a closed
position on the currency pair. If an option that is
about to expire is quite favorable to grip, the
investor can either buy or sell the later expiring
option. Always note the interest rate that is paid
by a currency trader or any that he may have
received in the course of these forex trades is
considered by the IRS as ordinary interest income
or expense. For tax purposesArticle Submission,
the trader of the currency should always keep
track the interest received or paid separate from
regular trading gains or losses.
ABOUT THE AUTHOR
Tom Aikins is a Bangkok-based journalist who
writes and does consulting work for
http://www.gomarkets.co.nz
INVEST FOREX WITH ONLY 25$
CLICK HERE
