With the development of the forex trading market, the meaning of holding "open" positions has become increasingly important. An "open" position refers to one held until the next trading day. At the end of each business day, depending on the currency pair and interest rate differentials, traders may see deposits and withdrawals associated with these positions.

These deposits and withdrawals are related to the forex financing rate. The forex financing rate is the interest paid or received by traders for holding a forex position until the next trading day.

What is a forex financing rate?

A financing rate, also known as "rollover rate" or "roll rate," is the interest paid or earned for holding a forex position until the end of the next trading day. The financing rate is not based on central bank rates but rather on interbank rates, which are the rates banks use when lending money between themselves.

Every trade involving a currency pair consists of two parts: traders are essentially "long" one currency in the pair and "short" the other. Each currency in a pair has its own interbank interest rate. Forex traders earn interest on the currency they are long while simultaneously paying interest on the currency they are short. The difference between the two interest rates is the net financing rate.

If the interest rate of the long currency is higher than that of the short currency, the net financing rate results in a deposit ("positive roll"). Conversely, if the situation is reversed, it results in a withdrawal ("negative roll").

Deposits and withdrawals related to the financing rate accumulate, so traders should understand how the net financing rate may impact a position over an extended period.

Additionally, financing rates are not 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.

Financing rate example

For a U.S. dollar (USD) account, regardless of the currency pair being traded, all profits and losses are converted to USD. For example, a trader may hold a long position of 100,000 EUR/USD at a rate of 1.2000. This means the trader is long the euro (€100,000) and short the equivalent in USD ($120,000).

In the above example, assume a EUR interest rate of 1.25% (annual rate, which translates into a daily rate of 1.25%/365 = 0.0034%) and a USD interest rate of 3% (which translates into a daily rate of 3%/365 = 0.0082%). Note: These rates are hypothetical and for illustrative purposes only.

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

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 USD is $9.84 (120,000 x 0.000082). This is the amount the trader would pay in interest. After grasping these basics, 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.