In the foreign exchange market, overnight interest is mainly due to the 24-hour trading process, where each product and transaction has a delivery time, and the overnight interest rate is also related to the delivery date. Overnight interest will be generated when customers hold positions overnight, and the overnight interest rate can be positive or negative.
When we trade, we may find that in addition to handling fees and trading profits and losses, there are also storage fees or interest, which is commonly known as overnight interest.
Overnight interest refers to the fact that in foreign exchange trading, positions must be delivered after two trading days. Position is a market agreement that promises to buy and sell the initial position of a contract, and the buyer of the contract is a long position, in a bullish position; The seller of the contract is a bear and in a bearish position.
The relevant positions usually do not maintain the same interest rate swap points, which are based on the relevant currency combination. The overnight swap interest varies between the two currencies and fluctuates with daily price changes. Foreign exchange refers to the creditor's rights held by monetary administrative authorities (central banks, monetary management agencies, foreign exchange stabilization funds, and the Ministry of Finance) in the form of bank deposits, treasury bills of the Ministry of Finance, short-term and short-term government securities, etc., which can be used in the event of an international balance of payments deficit.
1. Why is there overnight interest?
Usually, we pay interest when we deposit money in the bank, and when we borrow money from the bank, we also need to pay interest. Different currencies have different interest rates;When trading currency pairs, we usually involve two currencies, such as the highest overnight interest rate foreign exchange trader in EURUSD, which involves the euro and the US dollar.In fact, when we buy EURUSD, we buy (similar to a deposit) EURUSD and sell (similar to a loan) USD. Therefore, when the interest rates of these two varieties are different, there will be a difference in interest rates.This generates overnight interest.
Every product and transaction has a delivery time, and the overnight interest rate is also related to the delivery date.In spot foreign exchange trading, delivery must be made after two trading days, and the overnight interest rate is calculated based on the closing time of the New York market (the closing time of the New York market is 5:00 pm, which is 5:00 am Beijing time; in winter time, the morning6: 00). If we open our position on Wednesday, the delivery date will be on Friday; (In addition, due to weekend holidays, the weekend shipment date will be postponed to next Monday).
Usually, if we hold a position overnight, there will be overnight interest. Of course, there is no overnight interest for opening and closing positions on the same day.
2. Wednesday triple interest rate
Because weekends are usually a break time, banks are not open; But banks that hold positions on weekends still calculate interest as accountants. In addition, since the delivery date is 2 days later, if there are still positions on Wednesday, overnight interest for 2 days needs to be calculated on weekends;So if you hold a position overnight on Wednesday, the overnight interest rate is usually three times that of other trading days.
Why is it Wednesday?
This is mainly because according to international practice, foreign exchange traders with the highest overnight interest rates settle their transactions after 2 trading days.
Monday: 1-day overnight interest. Trading on Monday, settlement on Wednesday, holding positions from Monday to Tuesday, and settlement from Wednesday to Thursday will result in 1-day interest.
Tuesday: 1-day overnight interest. The holding time is from Tuesday to Wednesday, and the settlement date is from Thursday to Friday, so 1 day of interest needs to be paid/charged.
Wednesday: 3-day overnight interest. The holding time is from Wednesday to Thursday, and the settlement day is from Friday to next Monday, so 3 days of interest need to be paid/charged.
Thursday: 1-day overnight interest. The holding time is from Thursday to Friday, and the settlement day is from next Monday to next Tuesday, so 1 day interest is required to be paid/charged.
Friday: 1-day overnight interest. Hold the position from Friday to next Monday, with settlement days from Tuesday to Wednesday, so only one day's interest will be paid/charged.
In addition, for certain currencies such as the Canadian dollar, lira, ruble, etc., some brokers calculate triple overnight interest rates on Thursday.
3. Positive or negative overnight interest
Overnight interest will be generated when customers hold positions overnight. The overnight interest rate can be positive or negative, with a positive or negative sign representing the premium or discount between the one day forward exchange rate and the spot exchange rate.We can consider a positive value as a trader receiving a certain amount of overnight interest, while a negative value is considered as a trader paying a certain amount of overnight interest.
So why are there positive and negative?
It is generally believed that a positive value indicates that a certain amount of overnight interest can be obtained, while a negative value indicates that a certain amount of overnight interest needs to be paid. But this is only displayed by the trading system for the convenience of customers.It is wrong to conceptually understand the positive or negative value of overnight foreign exchange interest.
There are many calculation factors included in this, such as the T/N of the next day's trading, the bid/offer price quoted by the trader for the currency pair during settlement, and the bid/offer price quoted by the LP. If there are too many calculation results, if the short position is both positive or negative, the high interest currency long position will receive interest. Conversely, if the calculation results are positive and negative, Both long and short positions will receive interest payments.
Positive and negative numbers represent the cost of the swap spread from this value date to the next value date, rather than the direction in which the customer pays interest.Positive and negative numbers represent the cost of the swap spread from this value date to the next value date, rather than the direction in which the customer pays interest.At present, most currency pairs require payment from both customers, even if one of the currency pairs has a slightly higher interest rate, because the interest rate difference itself is very small, the interest rate difference is extremely narrow, and the cost of the banker's interest rate difference is slightly lower in Ringgit.The high interest currency has changed when the customer can receive interest and this cost is added, resulting in both parties having to pay interest. This is normal because retail costs are always higher than interbank costs.Currently, only a small number of currency pairs with large interest rate spreads will receive interest rates when they are long in high interest currencies, such as the Australian dollar against low or zero interest currencies.
Assuming that the euro interest rate is 1% and the US dollar interest rate is 0.25%, traders buy euros and receive 1% annualized interest, but also sell dollars. The US dollars are lent to traders by foreign exchange brokers, who charge interest (some foreign exchange brokers charge low interest, while others charge high interest). Assuming that foreign exchange brokers charge interest of 1.5%, plus the original interest rate of 0.25% in the US dollar, So traders need to pay a total of 0.75% interest.
4. Calculation of overnight interest
Regarding the calculation of overnight interest, some securities firms provide direct amounts, while others provide interest rates. The basic formula for calculating direct quantities is:
The overnight interest quotes for selling and buying EUR/USD on the same day are: 0.64-1.800, which means that when your position is selling 1 EUR/USD, then when your position is buying 1 EUR/USDWhen in hand, your trading account will receive $0.64 EURUSD and spend $1.80 in your trading account.
The basic formula for calculating interest rates:
Assuming that you buy three pounds per dollar on Monday, with a market price of 1.7718/1.7722, and hold the position overnight until Tuesday. The pound is a high interest currency, and the US dollar interest rate is lower than the pound on Tuesday.For example, if the interest rate difference is 0.42% (annual interest rate difference), customers holding pounds will receive interest.The calculation method is as follows: 0.42%/360 * 10000 * 3 hands * 1.7722 * 1 day=$0.62, which is the daily average annual interest * corresponding account funds * hands * buy (sell) price * quantity interest calculation days.
【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.