What it means
Whenever a financial commitment is carried forward, someone has to decide what it will cost or earn in the new period. That price is the rollover rate.
It matters in any business that borrows short term, holds deposits that reset, or trades currencies. In foreign exchange trading, every currency has its own interest rate.
If a trader holds a position past the daily cut-off time, they effectively borrow one currency and lend the other. The rollover, sometimes called the swap, is the net interest, and it can be a credit or a debit.
The size of the rollover depends on the interest rate difference between the two currencies and on the size of the position. Holding a currency with a higher rate against one with a lower rate usually earns a positive rollover, while the reverse costs money.
Brokers also add their own margin, so the amount on the statement may differ from the pure rate gap. In corporate lending, the rollover rate applies to loans that reset periodically.
A floating rate loan may be repriced each quarter at a reference rate plus a margin, and each reset is a rollover. Treasurers watch these rates because the cost of debt can change every time the loan rolls.
A related use is in customer or contract businesses, where a rollover rate describes the share of expiring contracts that are renewed. This is a retention measure rather than an interest rate, so always check which meaning is intended.
The main nuance is that rollover rates change, sometimes daily. A position that earns a small credit today can start to cost money after central banks change their rates, so long-held positions need regular review.
In practice
Real-world examples.
Example
A currency trader holds a position overnight in a high-interest currency against a low-interest one. Her account receives a small credit each night. She tracks the total credits against the risk that the exchange rate moves against her.
Example
A company has a $5,000,000 floating rate loan that resets every three months. At each reset the lender sets a new rate based on a reference rate plus a margin of 2.5%. The treasurer budgets for the new rate before each roll.
Example
A software company measures the rollover rate of its annual contracts. Of 400 contracts due for renewal, 340 are renewed, so the rollover rate is 340 / 400 = 85%. The sales director uses the figure to forecast next year's recurring revenue.
Formula
Calculation
Daily rollover = position size x (interest rate of currency bought - interest rate of currency sold) / 365
Suppose a trader holds a long position worth $100,000 in a currency that pays 5% per year, funded by selling a currency that pays 1% per year. The rate gap is 5% - 1% = 4%. Annual rollover = 100,000 x 0.04 = $4,000. Daily rollover = 4,000 / 365 = about $10.96 credited each night the position is held, before any broker margin.Case study
Seen in the real world.
Calder Imports is an illustrative, fictional business that held a short-term currency position as part of a hedge against a large supplier payment. The position was worth $800,000 and had to be kept open for 60 days.
The treasury team noticed that the currency they were selling had a higher interest rate than the one they were buying, so the position cost money each night. At a rate gap of 2%, the annual cost would be 800,000 x 0.02 = $16,000, or about $44 a day.
Over 60 days, the cost was about $2,630, which the finance manager included in the total price of the hedge. The illustrative lesson is that the rollover rate is part of the real cost of holding a position, and it should be included in the budget. The treasury team also agreed to review the rate weekly, because a change in either central bank's policy rate would alter the nightly cost without any change in the hedge itself. They recorded the review in the hedge file so that auditors could see how the cost had been monitored.
Watch out
Common mistakes.
- Ignoring the rollover charge on a position held for weeks, which can add up to a meaningful cost.
- Assuming the rollover is always a credit when the trader is on the higher-yielding side, since broker margins can turn it negative.
- Confusing the interest-based rollover rate with a contract renewal rate, which is a retention measure.
Questions
People also ask.
Is the rollover rate fixed?
No, it changes whenever the underlying interest rates or the broker's terms change, so it needs to be checked regularly.
When is a rollover applied?
In currency trading it is usually applied when a position is held past the daily cut-off time set by the broker.
Can a rollover rate be negative?
Yes, if you hold the lower-yielding currency against the higher-yielding one, the net interest is a cost.
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