What is Swap?
Market swaps are used to roll over open positions overnight in the Forex and CFD markets.
They can be either positive or negative depending on the difference between interest rates. The sum, credited/debited as pay for rolling over a position is called Storage. The final swap amount is dependent on many factors, such as current interest rates in different countries, movement of the pair under scrutiny, forward market conditions, dealers expectations and swap-points of the broker's counteragent. We provide a theoretical basis for market swap calculations below.
Suppose that the interest rate of the European Central Bank (ECB) is 4.25%, and the FED interest rate is 3.5% per annum. Let's assume that you have a short position (Sell) on EURUSD per 1.0 lot. Respectively, you sell 100,000 EUR. In other words, you borrow them at a rate of 4.25%. By selling the Euro, you buy US Dollars, which are deposited at a rate of 3.5%. If the interest rate of the country whose currency you bought (USD – 3.5%) is more than the interest rate of the country whose currency you sold (EUR – 4.25%), the swap will be credited to the trading account in the deposit currency, otherwise it will be debited. It is also worth mentioning that swap also includes the broker's commission for rollover.
In total, your expenses on this transaction equal 1% per annum (the difference between the interest rates "InterestRateDifferential" = 4.25% - 3.5% = 0.75%), plus the broker's commission for transferring your position to the next day (0.25%). It is then necessary to convert the swap value, expressed per annum, into the deposit currency.
How to calculate Swap?
If you buy a currency with a lower interest rate (USD - 3.5%) than the one you sell (EUR - 4.25%), the swap will be debited from the trading account.
Let's consider the formula:
SWAP = (Contract * (InterestRateDifferential + Markup) / 100) * Рrice / DaysPerYear, where
- Contract = 100,000 EUR (1 lot);
- Рrice = 1.3500 – current market price of the currency pair (EURUSD);
- InterestRateDifferential = 0.75% –the difference between the countries' interest rates;
- Markup = 0.25% –broker's commission;
- DaysPerYear = 365 –number of days in a year.
Calculation:
- 1. SWAP = (100,000 * (0.75 + 0.25) / 100) * 1.3500 / 365 = 3.70 USD.
This means that when the open short position on EURUSD is transferred to the next day, 3.70 USD will be debited from your trading account for each lot.
If you have a long position (EURUSD), swap will be credited to your trading account, as you have bought a currency with a higher interest rate (EUR – 4.25%) than the one you sold (USD – 3.5%).
The formula to calculate swap is as follows:
SWAP = (Contract * (InterestRateDifferential - Markup) / 100) * Рrice / DaysPerYear
Calculation:
- 1. SWAP = (100,000 * (0.75 - 0.25) / 100) * 1.3500 / 365 = 1.85 USD.
This means that when the open long position on EURUSD is transferred to the next day, 1.85 USD will be credited to your trading account for each lot.
Sometimes the difference between interest rates does not exceed the broker's commission. In this case, swap is debited from a trading account for both long (Buy) and short (Sell) positions.
Note: Storage for rolling over your position from Wednesday to Thursday is credited/debited threefold, since the value date for a position opened on Wednesday is Friday. When a position is carried overnight from Wednesday to Thursday, the value date becomes Monday (3 days away). This is why storage for positions carried over from Wednesday to Thursday is three times as much.
Let's consider how open positions are rolled over in the Share CFD market.
A Contract for Difference (CFD) can be seen as purchasing shares on credit. If you trade CFD, you get all the benefits of the underlying share, including rise in price and credits of dividends, but for this, you must pay the seller commission for lending. It is similar to a bank loan: you borrow money to buy shares and get the benefits of a shareholder, but you pay the bank interest on the loan. CFD combines this process into a single deal. This process is opposite if you sell shares.
Note: Storage for rolling over your position on Gold (spot) from Wednesday to Thursday is credited/debited threefold, since the value date for a position opened on Wednesday is Friday. When a position is carried overnight from Wednesday to Thursday, the value date becomes Monday (3 days away). This is why storage for positions carried over from Wednesday to Thursday is three times as much.
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