DooPrimeHow to calculate foreign exchange overnight interest, is overnight interest a loss or a gain?

In this article, we will delve deeper into overnight interest. Firstly, we will explain the concept of overnight interest, followed by examples, and finally, we will demonstrate how to profit from overnight interest. Because many successful traders consider overnight interest as an important part of their trading strategy.

1、 What isforeign exchangeOvernight interest/Overnight interest（Rollover）？
As the name suggests, it is the daily interest that can be earned or paid based on the total number of positions held. Each currency has its own benchmark interest rate, which is usually set by the central bank of the country.
When you buy one currency, you actually sell another currency. So, the currency you buy will help you earn interest, but the currency you sell (or borrow) will need to pay interest. Every morning Beijing time5Click, your account will automatically settle net interest. Positions held before that point in time will receive or incur interest, while positions established after that point in time will not be held until the early morning of the next trading day5After clicking, otherwise you will not need to pay or earn any interest.
2、 How to calculate foreign exchange overnight interest?
After understanding the concept of overnight interest, it can be found that calculating whether you need to pay or receive overnight interest is actually very simple. Just subtract the interest payable on the day of buying currency from the interest payable on the day of selling currency. If the result is negative, it indicates that you will generally pay interest, while if the result is regular, it indicates that you will receive interest overall.
Overnight interest accrued daily=Interest receivable on buying currency - interest payable on selling currency=(Quantity of currency purchased)*interest rate/365- (Quantity of currency sold in)*interest rate/365(If the result is regular income interest, if the result is negative, interest will be paid)
For example, when you buy Australian dollars/When it comes to dollars, you are actually buying Australian dollars and selling US dollars. Assuming you have purchased a mini hand (i.e10000AUD in monetary units/The US dollar, based on the current establishment of the Bank of Australia1.5%Benchmark interest rate (Bank of Australia, Tuesday)（4month2Announce the maintenance of interest rates on1.5%(unchanged), you will earn every year150Interest in Australian dollars. use150AUD divided by365Day, the daily interest is calculated as0.41AUD.
On the other hand, we sold about7000USD（4month4Japanese Australian Dollar/The exchange rate of the US dollar is approximately equal to0.7000）So we need to pay annually157.5to175Interest on US dollars（3month20On the same day, the Federal Reserve announced that it would maintain interest rates at2.25%-2.50%Within the target interval (unchanged), divided by365Day, the daily interest is calculated as0.43to0.47US dollars. For the convenience of calculation, we can include the Australian dollar interest earned in the previous period（0.41）Convert to US dollars, which is0.29US dollars. Therefore, it is calculated that our overnight interest will incur losses every day0.14to0.18Interest on US dollars.
IIIIs overnight interest a loss or a gain?
After understanding overnight interest rates and calculations, a smart person may immediately discover a shortcut to making money lying down, which is to simply do long on high interest currency/Low interest currency or short selling low interest currency/High interest currency can continuously collect overnight interest income.
For example, if we sell a mini hand of pounds/Australian dollars, we will receive every day0.81Interest on US dollars. This may not sound like much, but over time, there will be over the course of a year295.65US dollars. And this is only interest, not including the profit that exchange rate fluctuations may bring us.
Furthermore, if we consider that we may only need to provide2%About the margin, so295.65The interest rate return on the US dollar has become quite substantial. This type of trading method, which involves holding a pair of currencies for a long time to earn their interest rate spread, is known as "carry trading" and has become one of the most popular trading methods in recent years.
Of course, things have never been so easy. While earning risk-free overnight interest, you bear the risk of exchange rate fluctuations. In pounds/In the case of a stable or falling Australian dollar exchange rate, overnight interest may add to your earnings, but once the pound is/The Australian dollar has risen against your expectations, and your short position may suffer significant losses, while the overnight interest you receive may not be able to make up for the losses suffered by your position.
Common issues with overnight foreign exchange interest rates
1. Why is the interest we calculate not consistent with the actual interest we receive?
This is because the interest rate we use to calculate interest is the benchmark interest rate provided by central banks of various countries. But when it comes to the bank, the actual overnight loan and deposit rates will have slight differences from the benchmark interest rate. So our calculations here are just to demonstrate and help readers understand the concept of overnight interest, and the specific interest calculation also needs to be based on different bank standards.
2. Why is the interest earned on the same currency always less than the interest paid out?
For example, if we buy Australian dollars/In US dollars, we generate revenue every day0.49USD interest; But if we sell Australian dollars/In US dollars, we will need to pay daily1.07Interest in US dollars. As a market maker, the interest paid by banks to traders is usually slightly lower than the benchmark interest rate, but the interest paid by traders to banks is higher than the benchmark interest rate. The ultimate result is that whether we buy or sell, we will lose some interest difference to the bank.
Finally, let's note that the overnight interest rate needs to be calculated slightly differently every Thursday. Because the foreign exchange market usually operates with2Each day is a cycle, which means starting from your position2Oh my god, your transaction is truly completed. So Thursday morning5The post transaction will be moved to the next trading day for calculation, which means that the completion time of this transaction is on Sunday5Point. But banks are not open on Saturdays and Sundays, so usually on Thursdays5Transactions conducted after the point will accumulate3Days of interest and on Tuesday morning5Settlement will be made on weekends without interest. In addition, holidays can also affect the calculation and settlement of interest.
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