Overnight financing: the charge for holding a position past the close

Overnight financing is a daily amount debited from, or occasionally credited to, your account for every leveraged position still open at a fixed point in the trading day. It is the cost of borrowing the money that makes the position bigger than your deposit, charged by the day because borrowing is priced by time.

Leverage is a loan, and loans accrue by the day

When you open a leveraged position, you are not buying the asset outright. You put up margin as collateral, and the rest of the position’s value is funded by someone else. That funding is the whole mechanism. If you hold a position worth ten times your margin, nine tenths of it is financed, and the party financing it expects to be paid for the time it is out there.

This is why the charge is daily rather than per trade. Spread and commission are transaction costs: they are assessed when you open or close, and holding time does not change them. Financing is a carrying cost. It has nothing to do with how often you trade and everything to do with how long you stay in.

In foreign exchange the mechanism is slightly different in form but identical in logic. Every currency position is simultaneously long one currency and short another. Holding it overnight means you earn the interest rate of the currency you are long and pay the interest rate of the currency you are short. The net of those two is the raw financing amount. Your venue then applies its own markup, which moves the number against you in both directions: it increases a debit and shrinks a credit.

That is the reason a credit is possible at all. If the currency you are long carries a higher rate than the currency you are short, the raw differential is in your favour, and if it is large enough to survive the markup, money lands in your account each day. Reverse the direction of the same position and the same differential now runs against you. The two sides are not symmetrical, because the markup is subtracted from whichever side you are on.

Why the rate is quoted per lot, not per trade

A financing rate has to be publishable in advance, before anyone knows what size you will trade. Quoting a flat amount per trade would be meaningless: it would charge the same for a position of one unit as for a position of ten thousand. So the rate is expressed per standard lot, or as a percentage of notional value per day, and then scaled to whatever you actually hold.

This also means two positions in the same instrument, opened at different times on the same day, accrue the same per-lot rate. The financing line is a function of size and direction, not of entry price or when you clicked.

Working an example through

These numbers are invented for the sake of the arithmetic. Nothing here is a real rate.

Suppose a venue publishes an overnight financing rate of 0.02% per day on long positions in a given instrument, and you hold a position with a notional value of $20,000. The daily charge is:

$20,000 × 0.0002 = $4 per day

Now suppose you put up $1,000 of margin to open that position, giving twenty to one leverage. The $4 is 0.4% of your margin, every day, before the market has moved at all. Hold it for thirty days and the arithmetic is:

$4 × 30 = $120, which is 12% of the $1,000 you committed

The position has not lost anything. You have simply paid $120 to keep it open. For the trade to break even, the price must move far enough to cover the $120 plus the spread you paid on entry and will pay again on exit.

Now run it the other way. Say the short side of the same instrument carries a published credit of 0.005% per day. The same $20,000 notional would earn:

$20,000 × 0.00005 = $1 per day

One dollar in, four dollars out. The gap between the two sides is the venue’s markup plus the underlying differential, and it is why the long and short financing rates on the same instrument are almost never mirror images.

The mistakes that cost the most

Treating financing as a percentage of margin. The intuitive reading of a financing rate is that it applies to the money you deposited. It does not. It applies to notional. Doubling leverage does not change the rate but it doubles the financing as a fraction of your capital, because the same notional is now supported by half the margin. People size positions on the basis of what they can afford to lose and then find the carrying cost scaled with the position, not with the deposit.

Forgetting the days the market is shut. Markets close but interest does not. Funding is priced by the calendar, so the days when a market is not trading still accrue, while the rollover points that collect the accrual only exist on the days it is open. The consequence is arithmetic rather than policy: if accrual runs through a closure and collection does not, then some rollover has to carry the accrual of more than one day. That makes the total financing on a position a function of which rollovers it sat through rather than of how many hours it was held, and two otherwise identical strategies shifted along the calendar from each other can accrue different totals with nothing about the trade itself having changed.

Assuming the rate is fixed. Financing is derived from underlying funding rates, which move. A position that was cheap to carry when opened can become expensive without any notification, because the input changed rather than the venue’s policy. Long holds are exposed to this in a way short holds are not.

Holding briefly across a rollover. There is no proration. A position opened minutes before the rollover point and closed minutes after it accrues a full day’s financing. If you are trading around that time, the cost of the position is materially different depending on which side of the rollover you are flat.

Looking at the trade’s result and not the ledger. Financing appears as a separate line, not inside your profit and loss on the position. A trade that shows a small gain can be a net loss once the accrued financing on it is counted. If the financing line is displayed separately from the position itself, the two have to be added together manually before you know how the trade actually went.

Reasoning about it next time

Three questions answer most of it. What is the notional value, not the margin? How many rollover points will the position sit through, including weekend ones? And which direction am I in, since the two directions of the same instrument are priced differently?

From there, the daily cost is notional multiplied by the daily rate, and the total cost is that multiplied by days held. Compare it against the price move you need, and you know whether the trade is worth carrying. Our funding rate calculator runs the same arithmetic for perpetual futures, where the equivalent mechanism is called a funding rate and settles more often than once a day. For the transaction side of the cost, the crypto fee calculator covers spread and commission, and the glossary defines the terms that appear on a statement.

Education only, not financial advice, and trading carries a risk of loss.