What is overnight interest?

Overnight interest is a common term in online foreign exchange transactions. Regardless of whether it is called inventory fees, financing fees, swap interest, English Rollover, Swap fee, Overnight interest, Overnight funding, they all refer to the same thing. Generally, when buying and selling, if investors have an open position at 5 pm Eastern Time (summer time) every day, there will be settlement activities and overnight interest will be generated. The interest includes the "interest rate spread" of the trading product and also involves the financing costs of the trading platform.

Note that investors need to pay or receive interest, depending on the product being traded. If you trade currency pairs, because the currency itself has an interest rate, there is an interest rate difference between a pair of currencies (i.e. two currencies). If the investor buys the side of the two currencies with a "clearly" higher interest rate, there is a chance to receive overnight interest. Vice versa, that is, to pay interest.

In addition, even if the market is closed on weekends and Sundays (including other holidays), overnight interest will still be calculated. Some trading platforms will calculate three days of interest on Friday. But in fact, the foreign exchange market is T+2 settlement, so in foreign exchange transactions, the interest for these three days is often calculated on the open positions on Wednesday.

Although there is a formula to calculate overnight interest in theory, it is not easy to calculate the final interest rate because it involves the financing costs of different trading platforms, the policies of the central bank, and the short-term fluctuations of the interest rate in the money market. However, most overnight interest information can be directly viewed on the trading platform, and brokers will even provide a detailed list for investors to understand.

Detailed introduction: What is overnight interest? How to calculate overnight interest

How Carry Trade Works

We often hear about the so-called carry trade, which is that investors borrow low-interest assets to buy other assets with higher returns. In foreign exchange trading, carry trade refers to buying higher-interest currencies for long-term holding. For example, investors buy AUD/JPY Australian dollar against Japanese yen. In fact, the operation of this margin trade is to borrow the corresponding Japanese yen and buy Australian dollars, that is, to pay the interest on the Japanese yen and receive the interest on the Australian dollar. If the interest rate difference is allowed, the carry effect is achieved.

Carry trade is a tradition in the foreign exchange market, but because major currencies have maintained low interest rates in recent years, this activity has become less meaningful in disguise.