Swap, also known as Rollover, Overnight Funding, or Overnight Interest, refers to the interest income or expense generated by an overnight position in forex trading as part of daily settlement activities. To put it simply, as long as an investor holds/buys/longs a currency with a higher interest rate against another currency with a lower interest rate, he/she may receive swap when holding a position overnight, and vice versa.

If an investor longs a high-interest currency, a swap fee will be added to the account’s balance on the trading platform if he carries an open position past the closing time (after 5 p.m. EDT, or 5 or 6 a.m. Beijing time). Shorting, on the other hand, will cause a swap fee to be deducted from the account’s balance.

Swap rates vary from currency pair to currency pair, depending on the central bank dominated interest rate differential of the two currencies, but this can also vary from day to day due to some other factors.

Note: On Wednesdays, the rollover interest is three times the normal as the settlement of contracts usually occurs after two business days (T+2). Therefore, investors trading on Wednesday would not be settled until the closing of the market on Friday. Because the market is closed on the weekend, two more days of interest will be added.

Calculation of Forex Swap

Each currency has its own interest rate, and each forex transaction involves two currencies, and therefore two different interest rates. A currency pair such as EUR/USD means you need to buy euros and sell dollars at the same time in a long position, or sell euros and buy dollars at the same time in a short position. As long as the interest rate an investor pays for a currency is higher than the rate at which it is sold, and there is a significant differential, an overnight interest (positive swap rate) is earned. However, if the interest rate of the currency sold is higher than that of the currency bought, an overnight interest (negative swap rate) needs to be paid. When calculating the swap, the following parameters will be considered:

Current market interest rates of two central Banks
Price movements in currency pairs
Forward market conditions
Short-term money market conditions
Broker fees

Swap calculation Example

Suppose the euro pays 3% a year and the dollar pays 2% a year. When we sell 1 lot of EUR/USD, that means we are selling the currency with a higher interest rate (EUR) and buying a currency with a lower interest rate (USD). Therefore, the net interest is -1%, and the idea is that we pay interest in euros and charge interest in dollars in the contract.

If the broker charges a handling fee of 0.5% (which is mostly administrative, or a fee for providing leverage), the total overnight interest is – 1.5% (- 1% – 0.5%).

Calculation formula :

Swap = [contract size x price x (interest rate differential – fee)] / 360 days

According to the above example, the swap calculation for shorting EUR / USD is as follows:

Contract size: 100000 euro (1 lot);
Price: EURUSD = 1.13;
Interest rate differential: – 1%;
Broker fee: – 0.5%;
Calendar days: 360 (most financial markets use 360 days for calculation)

Swap = (100000 x 1.13 x (- 1% – 0.5%) / 360 = – 4.7 USD

Notes for Investors

When the interest rate differential is smaller than the broker fee, it means that both long and short positions pay overnight interest.
Only the basic concept and calculation of swap are shown here. Different traders will offer different overnight interest according to different circumstances, which can generally be found on the trading platforms.
Interest rates are not fixed and will be updated regularly according to different factors and circumstances.
For positions held from Wednesday to Thursday, the brokers would typically calculate three times overnight interest, but there are some exceptions.

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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.

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