How to Calculate Financing Rates on Forex Trades

As a forex trader, it's important to understand the implication of holding an "open" position. An open forex position is one that's held through the close of trading from one trading day to the next. At the end of each business day, depending on the currency pair and the interest rate differential, a trader is likely to see credits and debits related to the position.

These credits and debits are related to the forex financing rate, which is the rate paid or received by forex traders to hold a forex position from one trading day to the next.

A financing rate (also known as a "rollover rate" or "roll rate") is the interest paid or earned for holding a forex position through the close of trading from one trading day to the next. The financing rate isn't based on central bank rates. Instead, financing rates are interbank rates, which are the rates banks use when lending money between themselves.

Every trade with a currency pair consists of two parts: A trader is essentially "long" one currency in the pair and "short" the other. Each currency in a pair has its own interbank interest rate. A forex trader earns interest on the currency they're long, while simultaneously paying interest on the currency they're short. The differential between the two interest rates amounts to the net financing rate.

If the long currency has a higher interest rate than the short currency, the net financing rate yields a credit ("positive roll"). The opposite scenario yields a debit ("negative roll").

Financing rate credits and debits add up, so traders should understand how the net financing rate will potentially impact a position over an extended time period. 

Additionally, financing rates aren't fixed. They change as interest rates change, so traders should be aware of these fluctuations and how they can affect the overall profitability of a position.

For an account in U.S. dollars (USD), all profits and losses, regardless of the currency pair being traded, will be converted to USD. For example, a trader might be long 100,000 EUR/USD at the rate of 1.2000. This means the trader is long the euro (€100,000) and short its equivalent in USD ($120,000).

In the above example, assume a EUR interest rate of 1.25% (an annual rate, which translates into a daily rate of 1.25%/365 = 0.0034%), and the USD has an interest rate of 3% (which translates into a daily rate of 3%/365 = 0.0082%). Note: These rates are hypothetical and not actual rates. For illustrative purposes only.

In this scenario, the following steps can help a trader understand how the net financing rate is determined:

• The daily interest on the EUR is €3.40 (100,000 x 0.000034). This is the amount the trader would receive in interest.
• The daily interest on the dollar is $9.84 (120,000 x 0.000082). This is the amount the trader would pay in interest.
• After getting these basics down, the EUR amount would be converted to USD based on the exchange rate. In this example, the trader converts €3.40 to USD (€3.40 x 1.2000) and gets $4.08.
• To calculate the net financing rate, subtract the interest paid from the interest earned: $4.08 – $9.84 = -$5.76. This represents a net financing rate of -$5.76.

Because the interest earned on the EUR is less than the interest paid on the USD, the account would be debited $5.76 for holding the 100,000 EUR/USD position over one business day.

The example above illustrates a negative roll. Each currency pair has a different interest rate differential, so some currency pairs may yield a net credit, while others may yield a net debit.

Even though forex trading is open nearly 24 hours a day when the market is open, the close of the trading day is considered 5 p.m. ET. Any position open at that time will be subject to financing.

At Charles Schwab Futures and Forex LLC ("Schwab Futures and Forex"), financing credits and debits are typically applied to the account sometime between 5:15 and 5:30 p.m. ET. Financing rates are calculated using 365 days, so weekends and holidays are counted toward the financing calculation.

In general, on Wednesdays, financing calculations will be three times ("3x") the normal daily financing calculations, because Wednesdays are typically used to account for weekends. However, there are some exceptions to the 3x financing on Wednesday. Bank holidays, for example, may alter the financing schedule. A forex broker's schedule should display how and when financing rates will be applied to an account.

Schwab Futures and Forex clients can view the financing rate for each currency pair rate on the thinkorswim^® trading platform. On the MarketWatch tab, select Financing Rates. This brings up a grid showing the long and short rates for each currency pair listed on thinkorswim (see below). Note: These rates are a sample guideline. Actual rates may vary.

It's important for traders to remember forex trading involves leverage and carries a high level of risk that isn't suitable for all investors.

Additionally, financing rates can change daily and are subject to various factors. Traders planning to hold positions overnight should be prepared for financing rates and review them regularly.