Understanding Swap (Interest/rollover)

Forex Trading is the exchange of one currency for another – by so doing, it is also followed by another related business, referred to as – swapping of one currency for another, and this is done for a period of time. when there is an exchange and re-exchange of two foreign currencies for two different value dates the process is referred to as “Swap Transactions“.

Forex is always traded in pairs, the first currency is the base and the second pair is a term or quoted currency, thus the swap market trades a fixed amount of either of the two.

In a Swap, there will always be two dates involved, The near date and the far date. There are odd-dates and straight dates. Odd-dates swap is all the other dates not falling on a straight date.

Kind of swaps

• BUY/SELL Swap
• SELL/BUY Swap

The Buy/Sell Swap – You buy the fixed currency for the near date and sell it for the far date.
The Sell/buy Swap – You sell the fixed currency for the near date and buy it for the far date.

It is also best to understand the most important aspects of swapping transactions, one needs to know about value dates, The bid/ask spread, odd dated swaps and points be it paying or earning. short-dated swaps are less than one month.

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Basically, there is an interest in which traders may earn or be charged for holding a position for more than 24 hours, and that’s called Interest/swap/rollover.

In Forex, when you open a position, it is always that, the actual value date is forward by 2 days, having said that, A transaction done on a Tuesday is for Thursday’s value – on Friday is for Tuesday’s value. The amount of swap is tripled to compensate for weekends on a Wednesday. Note that, a swap is not charged on weekends.

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If the currency bought has a great swap rate than they borrowed one the trader will earn a positive swap. It is best to check with your broker to provide you with the list of daily swap rates for each and every currency pairs available to trade. It’s best to know the interested fees paid and/or interest earned. The swap value can be in dollars and/or pips. there are Short-Dated Swaps and Forward Swaps

• Examples of Shorted Dated swaps are Tomorrow/Next, Spot/Next, Spot-a-week, Spot-two-weeks
• Examples of forwarding swaps are Spot/ Forward, Odd-dates, Forward/Forward, Long-dated

Short-Dated Swaps

Each of these examples has near the date and far date – The Tomorrow/Next’s near date is Tomorrow whereas the far is Day after Tomorrow. The Spot/Next’s near date is The Spot, and the far date is Day after spot.
Spot-a-week’s near date is the spot as well, and the far date is the same day in the following week, and finally, the spot-two-weeks’ near date is the spot whereas the far date is the same day two weeks later.

Forward Swaps

Spot/Foward’s near date is the spot and the far date is a straightforward date, The odd-dates’ near date is the spot, whereas the far date is a non-straight forward date.
The Forward/Forward’ near date is a straightforward date whereas the far date is still a straightforward date. The Long-Dates’ near date is the spot – whereas the far date is a forward date past 1 year.

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It’s basic mathematics when it comes to figuring out if you will earn an interest of pay an interest fee. if the base is higher in swap rate than the term currency – if you buy the difference of the swap rates is what a trader will earn, however, if the trader sells the base, the difference will be negative which in turn the trader is charged an interest fee.

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