Swap
Family IV · Costs
Not to be confused with commission, swap fee, forex swap, negative swap.
Swap is the cost or income of holding a leveraged position overnight. It is not a commission and not a spread: it reflects the interest rate differential between the two currencies in the pair, adjusted by the broker's own markup or markdown. A position held through the daily rollover cut-off is debited or credited with the resulting amount.[1]
How a swap is calculated
The swap on a position is derived from the difference between the two currencies' benchmark interest rates, plus or minus the broker's markup. The formula is:
- Swap = (interest rate differential + broker markup) × position size × days held ÷ 360 or 365
The rate differential is set by central bank policy and changes when those rates change. The broker markup is set by the broker and varies between firms and account types. The number of days can be more than one when a position is held over a weekend or holiday, because the value date rolls forward.
Worked example
A trader holds one standard lot of a pair where the base currency interest rate is 4.00% and the quote currency rate is 1.00%, with a broker markup of 0.50% against the trader. The position is held for one day.
The exact figure depends on the broker's markup, the day-count convention and whether the position is long or short the higher-yielding currency. A short position in the same pair would normally receive a credit instead.
When swap is charged
Swap is applied at the broker's daily rollover time, typically when the trading day closes in the broker's server time zone. Positions opened and closed within the same trading day do not incur swap. Positions held across the rollover are charged or credited for each day the position remains open. Many brokers apply a triple swap on one weekday to account for the weekend value date; which day that is varies by broker and by instrument.
What swap is not
Swap is separate from the spread, which is the difference between bid and ask and is paid on entry. It is separate from commission, which is a fixed or per-lot fee charged by some brokers on opening and closing. It is also distinct from the foreign exchange swap contract traded in the interbank market, which is an agreement to exchange two currencies on one date and reverse the exchange on a later date.
Often confused with
- commission
- A commission is a fee charged per trade or per lot at execution, whereas swap is an overnight financing adjustment that depends on holding time; the visible sign is that commission appears on the trade ticket at entry, while swap appears on the account statement at rollover.
- swap fee
- A swap fee is the specific debit charged when the rate differential and markup work against the position, whereas swap is the general term covering both debits and credits; the visible sign is a negative amount on the statement rather than a positive one.
- forex swap
- A forex swap is a money-market transaction in which two parties exchange currencies on one date and reverse the exchange later, whereas swap in retail trading is an overnight financing charge on a leveraged position; the visible sign is that a forex swap appears as a separate contract with two value dates, not as a line on a trading statement.
- negative swap
- A negative swap is simply a swap that results in a debit to the account, whereas swap itself can be either a debit or a credit; the visible sign is a minus sign before the amount on the statement.
See also
References
- ↑ Policy rate publications of the relevant central banks. Overnight financing follows the interest-rate differential between the two currencies, plus the broker's own markup, so the figure is not fixed.