Forex basic - Swap

Market swaps are used to roll over open positions overnight in the Forex markets. They can be either positive or negative depending on the difference between interest rates. The sum, credited/debited as pay for rolling over a position is called Storage. The final swap amount is dependent on many factors, such as current interest rates in different countries, movement of the pair under scrutiny, forward market conditions, dealers expectations and swap-points of the broker's counteragent. We provide a theoretical basis for market swap calculations below.

Suppose that the interest rate of the European Central Bank (ECB) is 4.25%, and the FED interest rate is 3.5% per annum. Let's assume that you have a short position (Sell) on EURUSD per 1.0 lot. Respectively, you sell 100,000 EUR. In other words, you borrow them at a rate of 4.25%. By selling the Euro, you buy US Dollars, which are deposited at a rate of 3.5%. If the interest rate of the country whose currency you bought (USD – 3.5%) is more than the interest rate of the country whose currency you sold (EUR – 4.25%), the swap will be credited to the trading account in the deposit currency, otherwise it will be debited. It is also worth mentioning that swap also includes the broker's commission for rollover.

In total, your cost for this transaction is 1% per annum (the difference between the interest rates "InterestRateDifferential" = 4.25% - 3.5% = 0.75%), plus the broker's commission for transferring your position to the next day (0.25%). It is then necessary to convert the swap value, expressed per annum, into the deposit currency.

Example 1. Rollover of Short positions (Sell) in the Forex market:

If you buy a currency with a lower interest rate (USD – 3.5%) than the one you sell (EUR – 4.25%), the swap will be debited from the trading account.

Let's consider the formula:

SWAP = (Contract * (InterestRateDifferential + Markup) / 100) * Рrice / DaysPerYear, where

Contract = 100,000 EUR (1 lot)

Рrice = 1.3500 – current market price of the currency pair (EURUSD)

InterestRateDifferential = 0.75% – the difference between the countries' interest rates

Markup = 0.25% – broker's commission

DaysPerYear = 365 – number of days in a year

Calculation:

1. SWAP = (100 000 * (0.75 + 0.25) / 100) * 1.3500 / 365 = 3.70 USD

This means that when the open short position on EURUSD is transferred to the next day, 3.70 USD will be debited from your trading account for each lot.