paying interest on forex positions

[Adamus]

I'm just wondering whether all forex brokers charge their clients interest on their forex positions, and how much.

At IB, when you're long over $100K, they pay you US base rate minus 0.25%, and when you're short over $100K, they charge you base rate plus 1%.

For example, simplifying it roughly, say I trade the EURCHF.

If I buy 100,000 EUR against the Swissy, I'll be long 100,000 EUR and short 142,000 CHF and say the trade lasts 24 hours (1/365) and the base rates are the same at 1%

1/365 * 0.75% * 100,000 = 2.05 EUR
1/365 * 2.00% * 142,000 = 7.78 CHF = 5.48 EUR

So interest earned - interest taken = 3.43 EUR

This is equivalent to more than 50% of the round-turn commission.

I guess I'll have to add it to the slippage and the spread too when calculating my transaction costs.

What the jargon for this? Something like 'carry charge'?

If I start trading 1,000,000 then the rates get more appealing - interest earned remains the same but the interest paid goes down to base rate + 0.5%.

Actually I don't know how IB calculates it. I trade on hourly bars, so some of my trades are over quickly enough to make it negligible, but it depends if they take a snapshot of the account at end-of-day or if they work it out to the hour - or minute.

What do people think?

 

[Rhody Trader]

Interest carry or rollover based on the differential between the overnight interest rates of the two currencies in question is pretty standard practice for overnight holds. And lest you think you can avoid it trading futures, the carry there is factored into the price spread between the futures and the spot rate (which converge at expiration).

 

[Adamus]

Overnight holds only? I guess that makes sense, it must be much easier to calculate in terms of the brokerage IT systems they have in place. I have to ask IB at what point in the day the interest charges are applied.

 

[Adamus]

Just for the record, IB bases their charges on the positions in the account at 17:00 US Eastern time.