Accumulation of interest on an investment, usually dependent on some kind of percentage or formula.
In general terms, to accrue means to come to one as a gain, addition, or increment, as in interest accruing in a savings account.
When an investor lends money as part of an investment in the financial markets he or she expects to earn a certain amount on this investment. In Forex trading, how interest is accrued or credited is handled through rollover interest.
Accruing Rollover Interest
In the retail Forex trading industry, a broker pays or charges clients rollover interest at certain rates for all open positions. This usually happens at 5:00 PM EST – at the end of the global trading session. Whether you accrue or are charged interest depends on your position and the interest rate differential between the two currencies for the particular pair you are trading.
For example, for the AUD/JPY pair the Reserve Bank of Australia’s base interest rate is higher than Bank of Japan’s base interest rate. Because the Australian Dollar accrues more interest for an investor than the Yen, the pair earns interest for a long position when a trader is buying and holding the Aussie and selling the Yen; while a short position charges rollover interest as a trader is selling the Aussie and buying the Yen.
Some investor’s try to capture this accrual of interest by holding positions in instrumentals such as GBP/JPY, which pays out interest due to the spread of interest rates between the UK and Japan. This is known as a carry trade and has an exchange rate risk because if the GBP/JPY declines, the interest accrued could be wiped out, and turned into a loss.
