|
Foreign Exchange Trading Interest Payments
Foreign exchange interest charges are determined by the difference between US interest rates and the interest rates in the corresponding country. The greater the interest rate differential between the currency pair, the greater the interest rate payment will be. Currently, the Japanese Yen has the greatest differential with the US Dollar, making the interest charge for holding rollover yen positions the most expensive foreign exchange position. Conversely, the British Pound has the smallest interest rate differential to the US Dollar, making overnight charges for GBP/USD the least expensive of the 4 major foreign exchange currency pairs.
The spot foreign exchange market is traded on a 2-day value date. For trades executed on Monday, the value day, or day of delivery, is Wednesday. However, if a foreign exchange position is opened on Monday and held overnight to Tuesday, then the next value day will be that Thursday. For foreign exchange positions that are opened and held overnight on Wednesday, the value date is in fact the following Monday, under the criteria that there is not a holiday in any of the participating markets. On Wednesday, interest is charged for Monday, meaning an extra two days of interest for the weekend when banks are not open and actual delivery of currency cannot be made. Friday is only one-day interest, since weekend interest was charged on Wednesday. It is important to understand that every foreign exchange deal has a value day. If the deal is not closed on the same day, then the trade is subject to rollover.
The overnight interest is shown in dollars in the ‘Interest’ column on the Deal Station platform. These foreign exchange rates are usually updated a few hours prior to 3:00 pm EST.
Foreign Exchange Spot/Next Swap Points
Here is an example for the calculations for interest rate swap points on any particular day...
EUR .80 points
JPY 1.7 points
GBP .60 points
CHF 2.10 points
* These points are taken from our news feeds every day around noon. Foreign exchange swap points are traded instruments and are subject to market volatility.
The formulas are calculated as follows:
EUR = .00008 x 100,000 = $8.
JPY = 15,000,000/105.25 = $142517.81 x 0.017 = JPY 2422.8/105.25 = $23.02
GBP = .00006 x 75,000 = $4.50
CHF = 150,000/1.57 = $95541 x .00021 = CHF 20.06/1.57 = $12.78 = $13
|
