Currency Swaps

Do you know what swaps are?

Foreign exchange swaps are an exchange agreement between two parties to exchange cash flows in one currency to another. While currency swaps involve two currencies, interest rate swaps only deal in one specific currency.

The swap is an interest rate that is applied to the nominal value of the open trading position over 24 hours. The word swap comes from the English word “swap” which means exchange.

When you buy a CFD, you are in some way committing to sell it during the day. If this is not done, we “trade” for a new day and the exchange rate is applied to our trading position, which is known as a swap.

The swap on Forex depends on the currency of the contract – it will not be the same amount in EURUSD and USDCAD.

Therefore, the swap fee, also known as the daily fee, varies based on:

  • the online broker
  • The type of position: buy or sell
  • The traded instrument
  • The number of days the CFD position is open
  • The nominal value of the position

How is the Swap calculated?

To understand how the swap is calculated, the following example will be used:

A trader believes that the Euro Australian Dollar (EUR AUD) pair is going to depreciate. Therefore, he decides, at the beginning of the day, to open a short position on the EUR/AUD. At the end of the session, the market has proved him right and the trader sees how the bearish trend of the pair has consolidated. For this reason, he decides to keep the position open.

By opening a short position on the EUR/AUD pair, what the trader is doing is selling euros and buying Australian dollars. Therefore, by holding the short position for more than one day, the trader:

  • It would pay for the euros sold the interest rate associated with the euro. For this example, 0% is considered.
  • You would charge for the Australian dollars purchased the interest associated with this currency, which, for this example, is considered to be 2%.

The swap is the net result of these money flows. In the example that has been explained, the resulting swap for the trader would be equal to the interest received minus the interest paid, that is: 2% – 0% = 2%. In this case, due to the difference between interest rates and due to the type of operation, the swap would mean extra income for the operator.
The swap is calculated on a daily interest basis, so in the example above, the daily swap would be around 0.0055%. This interest rate would be applied to the total amount of the open position.

The longer the time that a position remains open, the greater the impact of the swap on its economic result.

Depending on whether your position is long or short, the swap rate can be negative or positive. The amount of the swap depends largely on the exchange rate of the currency in question, but also on the custody fees (higher for commodities).

When is the Swap charged?

The exact moment the swap is charged to your trading account will depend on your broker. In most brokers, the trading swap is charged around midnight.

A reality that is less known by traders, even the most experienced traders, is that sometimes you have to pay the position maintenance fee for the entire weekend.

In some markets, the weekend swap is charged on Friday night, but in others, such as stock markets, swap fees are charged on Wednesday.

To confirm when your broker debits the trading account, it is best to look at the Contract Specifications or ask the broker directly.

Usually, the swap trading charge takes place between 23:00 and midnight Madrid time

The currency swap only applies to open positions at the time the swap is loaded.

Consult Swap in Metatrader 4

Swap points will vary from one broker to another, because they also depend on their liquidity providers. What we are going to pay or collect will also depend on the currency pair we are trading, and whether we are going long or short.

If our Broker operates with Metatrader 4, as it is in the vast majority of cases, it is very easy to know how much we will pay or charge for Swap.

To access this information, we go to “Market Watch”. We click with the right mouse on any pair, and a drop-down appears.

We can choose to see all the data, of all the pairs that the Broker offers us, or only of the pair that interests us.

When you click on “Symbols”, all the pairs appear. We select a pair, and then we click on “Properties” and it gives us all the data about the chosen pair.

The quick way is to click on “Specification” in the previous window, and it will give us all the details about the contract of the chosen currency pair.

Sounds interesting to you, right? Keep learning trading with DTP with upcoming articles on our Blog.

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