When are financing rates applied to an account?
Financing rate example
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.
When are financing rates applied to an account?
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.
Finding financing rates for a currency pair
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.
Source: thinkorswim
For illustrative purposes only.
forex financing and rolling
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.
