The AUD/USD is quoted at '0.7500/02' and the current interest rates for the US and Australia are as follows:
US: 5.25%*
AUS: 6.00%*
You buy A$100,000 @ 0.7502 and wish to hold this position overnight.
The interest rate differential between the currency you are buying (AUD) and the currency you are selling (USD) is calculated as follows:
1. AUD:
Value of your AUD position x Interest rate / 365 days = Interest received in AUD > 100,000 x 6.00% / 365 = A$16.44 - you receive on your long AUD position
2. USD:
Value of your USD position x Interest rate / 365 days / the AUD/USD exchange rate = Interest paid in AUD > US$75,020 x 5.25% /360 / 0.7502 = A$14.58 - you pay on your short USD position
3. Interest on AUD position - Interest on USD position = Interest rate differential > A$16.44 – A$14.58 = A$1.86 - you receive on your overnight position
* Rates based on the official overnight cash rate. This rate is subject to daily market fluctuations
The cost/benefit (benefit in the example above) of the rollover is then reflected as forward points as per FX market convention.
