For example, on a EUR/USD buy position, the euro is purchased against the US dollar. Every time that position is rolled over into the next trading day, the trader collects interest on the euro while paying interest on the US dollar. If the position is a sell, the trader would pay interest on the euro while collecting it on the US dollar. Interest rates are determined by the respective central bank associated with each currency. If the interest rate on the currency being purchased is higher than the one being quoted, the trader would collect the difference in interest rates.
Let’s examine the concept of rollover further by going back to our EUR/USD example. If the EU interest rate is higher than the US interest rate, and the trader rolls over a buy position, the difference between the EU and US interest rates, relative to the size of the position, would be collected by the trader. Conversely, if the position is a sell order, the difference between the EU and US interest rates, relative to the size of the position, would be debited from the traders account.
In Forex, the carry trade is a common method used by traders to collect money on both the movement a currency pair takes, as well as the interest collected when that position is rolled over. The goal of this trade is not only to rollover a position where the difference in interest rates works in the trader’s favour, but to do it when the difference in interest rates is forecasted to increase.
Going back to our EUR/USD example, if either the EU is forecasted to increase interest rates or the US is forecasted to decrease rates, the spread on interest rates would increase, and rolling over a buy EUR/USD position would net the trader an additional profit.