Overnight financing, what is it?

Topics O, Trading basics, Trading glossary

Any spread bet position or CFD trade still open when trading hours end is ‘rolling’ and may be subject to overnight financing. Overnight financing is not applicable to future instruments with a set expiry date, as the holding costs and interest are already built into the contract price.

When you go long on margin you are effectively borrowing from the broker, this is charged at 2.5% + LIBOR and is known as overnight financing. For short positions the interest rate is received, and this is calculated as 2.5% – LIBOR.  If LIBOR is greater than 2.5% the broker will credit your account with the financing but, as is currently the case, LIBOR is below 2.5% and therefore a charge is levied on the trader to hold a short position.

For FX positions held overnight the interest rate differential is used, plus 2.5%. These charges are annualised percentages of the total value of the trade.

Overnight financing is calculated on positions held at 10pm UK time.  Weekend financing is charged on positions held past Friday at 10pm.

Examples:

For example, you go long on the UK 100 Cash with a stake of £10 a point at a price of 5905.0.

The total value of this trade is the stake multiplied by the starting price (£10 * 5905) which equals £59,050.00.

If 1 month LIBOR is 0.5%, then this plus 2.5% is the total percentage charged = 3%

3% of £59,050.00 = £1,771.50

To find the overnight charge each evening, simply divide the total annual charge of £1,771.50 by 365.

This gives a charge of £4.85 per night.

If you go short on the UK 100 Cash with a £10 stake at a price of 5905.0, the overnight financing is calculated differently.

The total value of this trade is the stake multiplied by the starting price: £10 * 5905 = £59,050.00

The total value of this trade is £59,050.00 (£10 stake multiplied by a price of 5905).

If 1 month LIBOR is 0.5%, then subtract this from the 2.5% to give a total of 2% charged.

2% of £59,050.00 = £1,181.00

To find the overnight charge each evening divide this total annual charge of £1,181.00 by 365.

This gives a charge of £3.24 per night.

FX trades are slightly different because of the interest rate differential:

Suppose you go long on GBP/USD, at £10 per point with a price of 1.4337.

The total value of this trade is the stake multiplied by the price (£10 * 14,337 = £143,370.00).

If 1 month LIBOR is 0.4% and the US FED rate is 0.5%, then the differential between the two is 0.1%. This added to the 2.5% gives a total of 2.6% charged.

And 2.6% of £143,370.00 = £3,727.62.

To find the overnight charge each evening divide this total annual charge of £3,727.62 by 365.

This gives a charge of £10.21 per night.

Conversely, you opt to go short on GBP/USD, at £10 per point with a price of 1.4337.

The total value of this trade is the stake multiplied by the price (10 * 14,337 = £143,370.00).

If 1 month LIBOR is 0.4% and the US FED rate is 0.5%, then the differential between the two is 0.1%. This taken away from the 2.5% gives you a total of 2.4% charged.

2.4% of £143,370.00 = £3,440.88

To find the overnight charge each evening divide this total annual charge of £3,440.88 by 365.

This gives a charge of £9.43 per night.