Interest Rate differential.

I am new to forex, can anyone explain to me how the interest rate differential works?

Thankyou.

Sure, if you are long the currency with the higher interest rate then the currency you are short then you should be paid the difference of the two (for example, long gbp/usd). IIf instead you are short the higher interest rate and long the lower interest rate then you will have to pay the difference. I say 'should' be paid for positive differentials because there is no absolute requirement that your broker must do this. I know FXCM accounts typically always charge interest differentials regardless if you should be paid or not. The interest rate diferential affects typically happen at daily rollover. Some brokerages will only do the calculation based on your position at the time of rollover, other brokers like OANDA calculate it on a per second basis. With the later, interest rates will always affect your position in some way (very very minor for anything short-term). It is a minor cost per currency unit.

HG

In the spot forex market, trades must be settled in two business days. If a trader sells 100,000 euros on Tuesday, the trader must deliver 100,000 euros on Thursday, unless the position is rolled over. I automatically roll over all open positions to the next settlement date at 5 p.m. ET. Rollover involves exchanging the position being held for a position expiring the following settlement date. The positions being exchanged are usually not valued at the same price. The amount of the difference varies greatly based on the currency pair, the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices. For instance, on any given day, the rollover can be $2 per lot for USD/JPY and $15 per lot for GBP/JPY.
At 5 p.m. ET, funds are subtracted or added to accounts with open positions because of the automatic rollover. For accounts that have a margin requirement of 2% or more, funds are added to the account for positions in which the client is long (holding) the currency bearing the higher interest rate. Funds are deducted in the opposite circumstance. For accounts that do not have a 2% margin requirement, the rollover amount is deducted from the account for each position, regardless of the account's holdings. .
Note: On Wednesdays, the amount added or subtracted to an account as a result of rolling over a position tends to be around three times the usual amount. This "3-Day" rollover accounts for settlement of trades through.

josbarr,

Is this entirely true? I have a forex account with TradeStation at 1% margin and I'm pretty sure positive interest differentials are always paid at rollover.

HG