We deposit money in the bank, which will generate deposit interest, while borrowing money from the bank will generate loan interest. Buying currency pairs in foreign exchange transactions. When you buy euros/dollars, you actually buy (deposit) euros and sell (borrow) dollars to pay for the transaction. Therefore, whenever it is overnight, there will be overnight interest. Of course, if you open and close positions on the same trading day, there will be no overnight interest.
Is overnight interest income or expense?
When customers spend the night with their bills, overnight interest will be generated. Overnight interest is positive and negative. A positive value means that you can get a certain overnight interest, and a negative value means that you need to pay a certain overnight interest. Why are there positive and negative?
Every foreign exchange transaction involves two currencies, and each currency also has its own interest rate. When the interest rate of the currency you buy is higher than the interest rate of the currency you sell, you can earn overnight interest ("positive overnight interest"). But if the interest rate of the currency you buy is lower than the interest rate of the currency you sell, you need to pay overnight interest ("negative overnight interest").
Therefore, overnight interest may increase your transaction costs, and may also increase your profits.
Overnight interest calculation time
The calculation time of overnight interest shows the time in different time zones on the websites of different brokers, mainly because the company location of brokers is different, but it is actually a point.
For example, McCann's website shows that 5: 00 pm EST (new york time) is converted into 5: 00 am Beijing time; Credit Suisse Bank in Switzerland is at 23: 00 CET, which is 5: 00 am Beijing time. GKFX will settle accounts every afternoon 10 UK time, which translates to 5 am Beijing time.
Of course, all of the above are daylight saving time, and in winter time, it is 6 am Beijing time. Therefore, the settlement time will be 5: 00 am Beijing time in summer time (current time) and 6: 00 am Beijing time in winter time.
According to daylight saving time, any position established at 5: 00 am will be regarded as an overnight position, and overnight interest needs to be calculated. For positions established at 5: 001in the morning, overnight interest is calculated the next day; For positions established at 4:59 am, the overnight interest will be calculated from 5:00 pm.
Calculation of overnight interest
In the calculation of overnight interest, some brokers provide direct amount, and some brokers provide interest rate.
Calculation of direct amount:
The overnight interest quotation for selling and buying euros and dollars on that day is: 0.64- 1.800.
That means: when your position is selling 1 hand euro, your trading account will get 0.64 USD; When your position is to buy 1 hand euros, your trading account will need to pay $65438 +0.80 euros.
Calculation of interest rate:
Let's take an example to illustrate: suppose you buy three lots of GBP/USD on Monday, the market price is:1.7718/1.7722, and you hold your position overnight until Tuesday, where GBP is a high-interest currency and the interest rate of USD against GBP is low. For example, if the interest difference is 0.42% of PRMBuy (annual interest difference), customers who hold sterling will get interest.
The calculation method is as follows: 0.42%/360x 10000x3 x 1.7722x 1 day = 0.62 USD, that is, the number of days the average annual interest reaches * the corresponding account funds * the buying (selling) price * the number of interest-bearing days.
So where does the interest rate come from? Some are provided by several banks and are based on interest rate swaps. Usually, there will be no change in the day. However, when the market is extremely volatile, interest rates may change within a day.
Triple the interest rate on Wednesday
Most banks in the world are closed on Saturday and Sunday, so the overnight interest on foreign exchange positions is not calculated on these two days, but most banks still calculate interest on these two days. For this reason, the foreign exchange market will calculate the interest for three days for positions overnight on Wednesday, so the interest for positions overnight on Wednesday is generally three times that of positions overnight on Tuesday.
Why Wednesday?
Mainly international practice, foreign exchange transactions will be settled after 2 trading days.
Monday: 1 day overnight interest. Trading on Monday, settlement on Wednesday, holding positions from Monday to Tuesday, and settlement date from Wednesday to Thursday, so you have to pay/collect 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 the interest of 1 day should be paid/charged.
Wednesday: 3 days overnight interest. Hold positions from Wednesday to Thursday, and Friday to next Monday is the settlement date, so you have to pay/charge interest for 3 days.
Thursday: 1 day overnight interest. The position is held from Thursday to Friday, and the settlement date is from next Monday to next Tuesday, so the interest of 1 day should be paid/charged.
Friday: 1 day overnight interest. Hold positions on Friday until next Monday, and the settlement date is Tuesday to Wednesday, and only need to pay/collect 1 day interest.
It should be noted that the overnight interest of some currency pairs in some securities firms is calculated on Thursday for three days.
About holidays
There is no overnight interest for holidays, but the overnight interest for the extra day is calculated two working days before the holiday. Generally speaking, the currency involved in the transaction will calculate the overnight interest of the holiday when it meets an important national holiday. For example, on July 4th, the Independence Day of the United States, the Bank of America is closed, and the overnight interest of US dollar currency on all positions is calculated at 5pm on July 6th. 1.
arbitrage
When we talked about currency pairs in detail, we once said why high-interest currencies should be separated. An important reason is the possibility of carry trade in high-interest currencies. At the same time, take advantage of the interest rate gap in different countries and the high leverage advantage available in the foreign exchange market to realize carry trade.
Summary:
1. High interest rate currency and high leverage make arbitrage trading possible.
2. Many times there will be triple interest on Wednesday, but some currencies with brokers will have triple interest on Thursday, so you should pay attention.
3. Pay attention to interest multiples during holidays.
4. Some of the same currency pairs, whether you sell or buy, may have negative interest rates, mainly because the buying and selling rates of the two currencies are different. In fact, there are four interest rates in comparison, the interest rate of buying currency A-the interest rate of selling currency B; Interest rate for buying B currency-interest rate for selling A currency.