Positive interest
found on oanda web site > under interest…
Let us consider two specific examples:
Trade 1: Buy 1000 units EUR/JPY @ 91.7308 on Monday Jan 1, 2001 at 12:01am
Applicable interest rates:
Assume that the following interest rates apply for Monday Jan 1, 2001:
EUR – 4.76 / 4.81 %
JPY – 0.28 / 0.38 %
Note that the borrowing rate is quoted first, followed by the lending rate, and that interest rates are quoted in percentage points per year.
Calculate duration of trade:
Now assume that the trade is closed at 5:45am later the same day on Jan 1, 2001. The amount of time the trade is held open is 20580 seconds (= 12:01am – 5:45am), or 0.00065214 years (20580 secs / 31557600 secs—- there are 31,557,600 seconds in a year).
Calculate interest obtained on EUR:
For calculating the interest obtained on our EUR position, we use the following formula:
units * lifetime (in years) * EUR borrowing interest rate (%/year) * conversion to USD
If we plug in the appropriate numbers, we obtain:
1000 * 0.00065214 * 4.76% * EUR/USD bid exchange rate
= 1000 * 0.00065214 * 0.0476 * 0.8423
= USD 0.0261
Calculate interest charged in JPY:
For calculating the interest charged on our JPY position, we first note that we effectively are short 1000 Euros worth of Japanese Yen, which, with the exchange rate of 91.7308 is 91730.8 units of JPY (= 1000 * 91.7308) on which interest is charged. We then use the following formula similar to the one used above:
units * lifetime (in years) * JPY lending interest rate (%/year) * conversion to USD
If we plug in the appropriate numbers, we obtain:
91730.8 * 0.00065214 * 0.38% * JPY/USD ask exchange rate
= 91730.8 * 0.00065214 * 0.0038 * 0.00918
= USD 0.00209
Difference between the two interest amounts:
The account will be credited by the difference between the interest to be credited and the interest to be debited:
$0.0261 – 0.00209 = USD 0.02401
Note that in this case the customer is collecting significantly more money than they are paying, due solely to the discrepancy in interest rates between the base and the quote currencies. In this instance, the base currency (EUR) interest rate is higher than the quote (JPY) interest rate, which is referred to as a “discount” quotation.
If the inverse were true (base currency interest rate lower than the quote currency interest rate), the instrument would be said to be quoted at “premium”.
Trade 2: Sell 2000 units GBP/CHF @ 2.5882 on Monday Jan 1, 2001 at 04:00am
Applicable interest rates:
Assume that the following interest rates apply for Monday Jan 1, 2001:
CHF – 3.18 / 3.28 %
GBP – 5.97 / 6.00 %
Note again that the borrowing rate is quoted first, followed by the lending rate, and that interest rates are quoted in percentage points per year.
Calculate lifetime of trade:
Assume that this trade is also closed at 5:45am later the same day on Jan 1, 2001. The amount of time the trade is held open is 6180 seconds (= 04:00am – 5:45am), or 0.00019583 years (6180 secs / 31557600 secs)
Calculate interest obtained on CHF:
For calculating the interest obtained on our CHF position, we first calculate the number of CHF units the interest is applied to: 2000 GBP units worth of CHF with the exchange rate of 2.5882 is 2000 * 2.5882 = 5176.4. Then we apply the following formula again:
units * lifetime (in years) * CHF borrowing interest rate (%/year) * conversion to USD
If we plug in the appropriate numbers, we obtain:
5176.4 * 0.00019583 * 3.18% * 0.5606
= USD 0.01807
Calculate interest charged in GBP:
For calculating the interest charged on our GBP position, we again use the following formula similar to the one used above:
units * lifetime (in years) * GBP lending interest rate (%/year) * conversion to USD
If we plug in the appropriate numbers, we obtain:
2000 * 0.00019583 * 6.00% * 1.4516
= USD 0.03411
Difference between the two interest amounts:
The account will be credited by the difference between the interest to be credited and the interest to be debited:
$ 0.01807 – $ 0.03411 = – USD 0.01604
Since the amount is negative, the aggregate interest is charged to the account.