I need help understanding the forex overnight interest calculation.
Assume I believe the Yen will depreciate against the dollar. Therefore, I buy the Yen/Dollar pair. In effect, I borrow dollars which I use to buy the Yen.
Assume the annualized Yen interest rate is .5% and the US dollar interest rate is 1.5%. According my calculation, I should receive the difference between what it costs me to borrow (the yen at .5%) and the interest rate earned on USD (being 1.5%). So 1.5% earned less - .5% paid = 1% that I receive.
Am I correct or have I made some simple and stupid mistake, as I think I have?
Many thanks.
PS. My concern stems from reading this article http://ow.ly/HpVjI where it suggests when going long the NZD at an interest rate higher than the USD pays, then I would be charged interest (rather than receive it). That makes no sense to me. Here is their analysis.
Assume we enter a trade long one lot of NZD/USD on Monday and maintain the position overnight. The borrowing interest rate for NZD is 7.6%. The interest for one day is calculated at (0.076100000)/365 = 20.82 (NZD). Since the account is maintained in U. S. dollars, this amount needs to be converted to dollars. We find an exchange rate of 0.6808 for the day in question yielding a borrowing interest of $14.18.
The lending rate for USD is 3.75%. To calculate the interest, we need to know the number of USD units equivalent to 100,000 units of NZD, which is given by the price where the trade was opened. For example, 0.6879, making the lending interest calculation (0.03751000000.6879)/365 = 7.07 (USD). Subtracting the two interest values of 7.07 – 20.82 = –13.75. Since this value is negative, we will be charged interest of $13.75
Assume I believe the Yen will depreciate against the dollar. Therefore, I buy the Yen/Dollar pair. In effect, I borrow dollars which I use to buy the Yen.
Assume the annualized Yen interest rate is .5% and the US dollar interest rate is 1.5%. According my calculation, I should receive the difference between what it costs me to borrow (the yen at .5%) and the interest rate earned on USD (being 1.5%). So 1.5% earned less - .5% paid = 1% that I receive.
Am I correct or have I made some simple and stupid mistake, as I think I have?
Many thanks.
PS. My concern stems from reading this article http://ow.ly/HpVjI where it suggests when going long the NZD at an interest rate higher than the USD pays, then I would be charged interest (rather than receive it). That makes no sense to me. Here is their analysis.
Assume we enter a trade long one lot of NZD/USD on Monday and maintain the position overnight. The borrowing interest rate for NZD is 7.6%. The interest for one day is calculated at (0.076100000)/365 = 20.82 (NZD). Since the account is maintained in U. S. dollars, this amount needs to be converted to dollars. We find an exchange rate of 0.6808 for the day in question yielding a borrowing interest of $14.18.
The lending rate for USD is 3.75%. To calculate the interest, we need to know the number of USD units equivalent to 100,000 units of NZD, which is given by the price where the trade was opened. For example, 0.6879, making the lending interest calculation (0.03751000000.6879)/365 = 7.07 (USD). Subtracting the two interest values of 7.07 – 20.82 = –13.75. Since this value is negative, we will be charged interest of $13.75
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