The swap is a special instrument for exchanging assets between two market participants. In general, this is expressed in the fact that the two parties enter into a contract for the purchase (sale) of a certain asset through strictly stipulated terms that both parties find acceptable. The main goal of swap contracts is to increase the number of transactions, thereby increasing the money turnover on the deposit. Also, the swap is used as a hedging item for risk adjustment.
Today there are a lot of swap contracts in the financial markets, but there is only one currency swap used in the forex market.
The currency swap represents the difference between the interest rates of the base currencies included in the currency pair. It is credited to the account (or taken from the account) when the transaction is transferred the next day (rollover). Since we are talking about a difference, the value of it can be positive or negative. For ease of understanding, let's look at how this works in practice. For example, let’s talk about the EUR/USD. The current ECB interest rate is 0%, and the rate from the Fed is 1%.
In this case, a positive difference will be possible when opening a short position – CALL EUR/USD. In this case, we sell the euro, and buy dollars. Given the interest rate swap, 1% is obtained.
1% - 0% = 1%
Negative difference will be obtained in the reverse trade – when you buy EUR/USD or buy the PUT options. In such a contract, we buy the euro and sell the dollar, which gives us a swap calculation of -1%.
0% - 1% = -1%
Forex trading is conducted with borrowed funds, so the investor either borrows money or lends it. For example, the investor decided to sell the dollar. He does not have enough funds on his account to open a position, so he takes the money on credit, respectively, and pays the Fed’s interest rate of - 1%. The reverse situation is the purchase of dollars. In this case, the investor's money will already be used as collateral for other market participants, as a result of which he is supposed to receive 1%.
Keep in mind that the swap is calculated only when the trade is postponed the next day!
Click here to view a complete list of current overnight rollovers.
Also note : the MT4 platform calculates overnight rollover at 21:00 GMT and the rollover charge/credit is debited or credited to and from the trading account. On Wednesday at 21:00 GMT, overnight rollover fees are multiplied by three (x3) in order to compensate for the upcoming weekend.