The most common costs associated with trading currencies are the spread and rollover rates.

The spread is the price you pay on each trade order you make.

When trading a currency, you are borrowing one currency to purchase another. The rollover rate is typically the interest charged or earned for holding positions overnight. A rollover interest fee is calculated based on the difference between the two interest rates of the traded currencies.

Positions at a discount

If the currency you are buying has a higher interest rate than that which you are selling, you will earn rollover fees – this is referred to as a position being at a discount.

Positions at a premium

If the currency you are selling has a higher interest rate than that which you are buying, you will pay rollover fees. This is a position at a premium.

Example:

You’re trading EUR/NZD (Euro/New Zealand Dollar). The EUR has a low interest rate whereas the NZD has a relatively high interest rate. You are borrowing the high-rate currency to buy the low-rate one, so you are trading at a premium: you will pay rollover fees on this trade if held overnight. If you sell EUR (i.e. go short) to buy NZD, you will be trading at a discount and earn rollover rates on this trade.

Definition of ‘overnight’

Currency markets trade 24 hours a day through the working week, so ‘overnight’ is defined as holding the position at market close in New York – 5pm ET.