Overnight interest
| Overnight interest |
| Overnight interest (English: Rollover / Overnight Interest / Swap), also known as "swap interest rate" or "overnight interest", refers to the position held by investors in foreign exchange transactions (that is, the contract share, whether it is bullish or bearish). Interest income or expenditures generated during daily settlement activities. To put it simply, as long as an investor sells another currency with a lower interest rate, and thus buys and holds a currency with a higher interest rate, and there is a significant interest rate differential, overnight interest may be charged. If the investor is in a currency with a high interest rate, if the open position has passed the settlement time (5 pm Eastern time, that is, 5 am or 6 am Beijing time), the overnight interest will be in the dealer’s platform. It is added to the capital of the account. On the contrary, if you are short, the relevant overnight interest will be deducted from the capital of the account. Different currency combinations will have different overnight interest rates, because it depends on the interest rate differential between the two in a currency pair that is dominated by the central bank, but this can also be changed by some individual factors every day. |
| The calculation method of overnight interest |
| Each currency has its own interest rate, and each foreign exchange transaction involves two currencies, so two different interest rates are involved at the same time. 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 the investor is higher than the interest rate of the currency sold, and there is a significant interest rate difference, they can earn overnight interest (positive overnight interest). However, if the interest rate of the sold currency is higher than the interest rate of the purchased currency, overnight interest (negative overnight interest) will need to be paid. When calculating the specific overnight interest, the following parameters are mainly considered: The current market interest rates of the central banks of the two countries Price movements of currency pairs Forward market conditions Short-term currency market conditions Dealer's fee |
| Simple example |
| If the annual interest rate of the euro is 3%, the annual interest rate of the US dollar is 2%. When we sell 1 lot of EURUSD, it means selling a currency with a higher interest rate (EUR) and buying a currency with a lower interest rate (USD). Therefore, the overnight interest is -1% (2%-3%). The concept behind it is that we pay interest in Euros and charge interest in US dollars in the contract. If the dealer charges a 0.5% handling fee, which is mostly an administrative fee, but it is also a fee for providing leverage, the total overnight interest that needs to be paid is -1.5% (-1%-0.5%) |
| Swap interest calculation formula |
| Overnight interest = [contract size x price x (interest spread-handling fee)] / 360 days |
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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 difference: -1%; Dealer's handling fee: -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 |