Forex swap
Family I · Instruments
Not to be confused with swap fee, swap, negative swap.
Forex swap is a money market transaction in which two parties exchange currencies at an agreed spot rate and simultaneously agree to reverse the exchange at a later date at a forward rate. The forward rate is set so that the difference between the two rates equals the interest rate differential between the two currencies over the period. In retail trading, the term is also used for the daily rollover adjustment applied to an open position.
Structure and pricing
A forex swap has two legs: a near leg, usually at the spot date, and a far leg at a future date. The near leg is executed at the prevailing spot rate, and the far leg is executed at a forward rate calculated from the spot rate plus or minus forward points. Those points are derived from the interest rate differential between the two currencies for the relevant term, adjusted for day count conventions and the broker's or counterparty's spread.
In institutional markets, forex swaps are used to fund foreign currency positions or to manage liquidity. In retail margin trading, the same term often refers to the daily rollover credit or debit applied to a position held past the daily cut-off, which is based on the same interest rate differential but may be adjusted by the broker's markup.
Worked example
A trader enters a one-month EUR/USD swap. The spot rate is 1.1000, and the one-month forward points are +12 pips (0.0012). The trader buys EUR 1,000,000 at spot and sells EUR 1,000,000 one month forward at 1.1012.
The positive result reflects the interest rate differential in favour of holding EUR over the period, before any broker markup or fees.
Variations and conventions
Forex swaps can be short-dated (overnight to one week), medium-term (one month to one year), or long-term (beyond one year). The forward points may be positive or negative depending on which currency has the higher interest rate. In retail trading, the daily rollover amount varies by broker and is often expressed as a swap rate in points or as an annualised percentage. Traders should check the specific contract specifications and rollover schedule provided by their broker, as these are not standardised across the industry.
Often confused with
- swap fee
- A swap fee is a charge levied by a broker for holding a position overnight, whereas a forex swap is the underlying currency exchange transaction or the interest rate differential itself; the visible sign is that a swap fee appears as a separate cost line on a statement, while a forex swap is embedded in the forward points or rollover rate.
- swap
- A swap is any agreement to exchange cash flows or assets, including interest rate swaps and cross-currency swaps, while a forex swap specifically involves the exchange of two currencies at two different value dates; the visible sign is that a forex swap always has a spot leg and a forward leg in two currencies.
- negative swap
- A negative swap is a rollover adjustment that debits the trader's account, whereas a forex swap can result in either a credit or a debit depending on the interest rate differential; the visible sign is the minus sign on the account statement for the rollover amount.