Overnight interest (English: Rollover / Overnight Interest / Swap) is also called "swap rate" or "overnight interest", which refers to the interest income or expenditure generated by the position (i.e. contract share, whether bullish or bearish) held by investors in foreign exchange transactions during daily settlement activities . For example, as long as the investor holds/buys/calls a currency with a higher interest rate against another currency with a lower interest rate and there is a significant interest rate difference, overnight interest may be charged.
If an investor is long on a high-interest currency, if the open position passes the settlement time (5 p.m. EST, 5 a.m. or 6 a.m. Beijing time), the overnight interest will be added to the account's capital on the trading platform. On the contrary, if the investor is short, the relevant overnight interest will be deducted from the account's capital.
Different currency pairs will have different overnight interest rates, as this depends on the interest rate differential between the two central banks in a certain currency pair, but this can also change due to some individual factors every day.
Special note: When settling on Wednesdays, most traders will calculate three times the overnight interest of normal days. Because in the market, the contracts traded by investors will not be officially settled until two trading days later (T+2). Therefore, investors who trade on Wednesday will have their settlement extended to the close of Friday. Since there is no trading on Saturday and Sunday, two more days of interest will inevitably be calculated.
Each currency has its own interest rate, and each foreign exchange transaction involves two currencies, and therefore two different interest rates. In foreign exchange transactions, such as EUR/USD, buying euros means selling dollars at the same time, and selling euros means buying dollars at the same time. As long as the interest rate of the currency bought by investors is higher than the interest rate of the currency sold, and there is a significant interest rate difference, overnight interest can be earned (positive overnight interest). However, if the interest rate of the currency sold is higher than the interest rate of the currency bought, overnight interest (negative overnight interest) must be paid. When calculating the specific overnight interest, the following parameters are mainly considered:
If the annual interest rate of the Euro is 3% and the annual interest rate of the US dollar is 2%. When we sell 1 lot of EURUSD, it means selling the currency with a higher interest rate (EUR) and buying the currency with a lower interest rate (USD). Therefore, the overnight interest rate is -1% (2%-3%). The concept behind this is that we pay the interest of the Euro in the contract and receive the interest of the US dollar.
If the broker charges a commission of 0.5%, which is mostly an administrative fee, it may also be a fee for providing leverage, and the total overnight interest to be paid is -1.5% (-1%-0.5%).
Swap = [Contract size x price x (interest rate difference - handling fee)] / 360 days
According to the above example, the overnight interest calculation method for shorting EUR/USD is:
Contract unit: 100,000 Euros (1 lot);
Price: EURUSD = 1.13;
Interest rate spread: -1%;
Dealer commission: -0.5%;
Calendar days: 360 (most financial markets use 360 days as the base).
Overnight interest = (100,000 x 1.13 x (-1% - 0.5%)/360 = - 4.7 USD
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.