SWAP

The term "swap" in the context of retail forex trading refers to the interest rate differential between the two currencies being traded. Retail forex brokerage firms often charge or credit traders with a swap rate when they hold a position overnight. This is also known as a rollover or overnight financing fee.

Rollover SWAP

The swap rate is influenced by the interest rate differential between the two currencies being traded. When a trader holds a position overnight, they are essentially borrowing one currency to buy another. The swap rate reflects the cost or benefit of this borrowing.

A swap in forex refers to the interest that you either earn or pay for a trade that you keep open overnight.

Most brokers use the Tom/Next (Tomorrow/Next) adjustment to roll open positions over to the next trading day. The main component forming the Tom/Next is the interest rates differential between the currencies The rollover fees in our simulated trades are dynamically generated based on the interest rates values matching the backtesting session time using the following fomula: Roll over rate = (Interest rate of EUR – Interest rate of USD) / 365 * exchange rate

For instance, if the base currency has an interest rate of 5% and the quoted currency has a rate of 3%, If we were to buy the currency that pays 5% against one that pays 3%, you would be paid on the difference with daily interest payments of (2%/365 days) * exchange rate.

Brokers apply the swap rate by directly changing the AVG position open price. If you see swap in your trade reports , then this values are most likely indicative and in reality the rollover happen in the form of pips/ticks by directly changing the open price of the trade.

Key points:

  1. A swap or rollover is the interest earned or paid for a position kept open overnight.
  2. A rollover/swap is often calculated as pips or a ticks (min price move of contract).
  3. Check your broker Overnight Policies because the swap will vary from broker to broker.
  4. Wednesday credit/debit charge carries at a triple rate. It might be the Thursday or Friday check broker's policy.
  5. Additional fees may be added if applicable by the broker. (admin fee, financing cost )

Currency SWAPs

While the terminology is similar, retail forex swaps and currency swaps are distinct concepts.

Currency swaps are a different financial instrument involving the exchange of cash flows in different currencies. In the context of retail forex trading, the term "swap" is used to refer to the interest rate differential charged or credited for holding a position overnight.

Currency Swaps are one of the most complex financial derivatives.

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Interesting readings:

FX spot and swap market liquidity spillovers

https://www.bis.org/publ/work836.pdf

BIS (Bank for International Settlements) by members of the Monetary and Economic Department

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FX Swaps: IMF (International Monetary Fund)

https://www.imf.org/external/pubs/ft/wp/2010/wp1055.pdf

IMF (International Monetary Fund) FX Swaps: Implications for Financial and Economic Stability Prepared by Bergljot B. Barkbu and Li Lian Ong