How to calculate SWAP?

Swap - a concept that is incomprehensible to everyone who begins their adventure with the Forex market. They don't know where it comes from, and often don't even realize that it exists - until they hold the open position for at least a few nights. So what is it, what does it result from and how to calculate the swap?

What is swap?

Swaps on forex platforms are cost (or profit) resulting from leveraging and holding positions overnight for the next day. These are points that result from the difference in interest rates, e.g. from the currencies in which we invest. They can increase our profit or decrease it, especially if we play in the long term.

How does the swap work?

Playing on a leveraged market like Forex, where there is no physical exchange, you open a long position on EUR / USD in fact, we use dollars to buy euros that we actually do not have. In addition, by multiplying the value of the transaction by the financial leverage. Simplifying the whole process, we can say that we take out a loan in USD and invest it in EUR. It will be similar in the case of a short position, where we borrow EUR and invest funds in USD.

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Holding a position overnight for the next day comes to a situation where we have to settle this loan. Depending on the interest rates in both these countries and the difference between them, we can additionally earn or pay extra.

How to calculate the swap?

Swaps are expressed in swap points and depend on the difference in interest rates of the country of origin of the instrument (two currencies in a pair). The formula for calculating the swap rate is not very useful for us. This is due to the fact that the broker's margin, determined by the company itself, is added to the swap rate itself. Therefore, swaps may differ (and differ) depending on the broker, not just the instrument itself.

Assuming that in Australia interest rates are 2,50%, and in the USA below 0,25%, it can be stated in advance that even with a high broker's margin for a long position on AUD / USD we will get positive swap points, and negative for a short position.

In a situation where rates in both countries are at a similar level (e.g. GBP 0,5% and USD <0,25%), we will usually deal with a situation where both for buy and sell swap rates will be negative ( due to the margin).

Brokers in the tables of the financial instruments specification give swaps in swap points eg GBP / USD swap Long -0,15, Short -0,35. The question then is how it translates into our real profit / loss.

A swap point is a swap expressed in pips (or parts of them) for a given currency pair, so this rate is enough to multiply by the pip value, as well as our transaction volume. The value obtained is the amount of funds in the quoted currency, which will be added to the balance sheet item for holding the transaction for each one night.

Let's see it with a simple example

For a long transaction on GBP / USD with the 0.3 volume, a swap of -0,5 USD will be charged for keeping the position for the following day. If we run an account in a different currency, for example PLN, then the swap will be converted into the currency of our account at the current average USD / PLN exchange rate at the time of its calculation.

When is the swap charged?

Swap points on platforms Forex they are usually charged at 00:00 our time for brokers from Europe. Nevertheless, it happens that some add it as early as 23:00 (mainly Cypriot brokers). These hours can be completely different and adapted to local time zones, where in the case of companies from America or Asia, these differences can be up to 6 hours in relation to our time zone.

Weekday swaps

Due to the fact that FX platforms do not work on weekends, rates for Saturday and Sunday are added in the middle of the week. The most common solution used by brokers is to count the triple swap value from Wednesday to Thursday. There are also companies that charge double value from Wednesday to Thursday and Thursday to Friday.

The swap rates themselves, the frequency of their updates, as well as the day and time they are charged are regulated solely by the broker individually. Details of swaps are usually found in the specification of financial instruments.

Accounts without swap

Some brokers offer so-called Islamic or swap-free accounts. These are bills that do not have swap points. Usually, they are proposed to people professing Islam because religion prohibits them, among others reaping profits from interest. Occasionally there are companies that open such accounts to all investors regardless of their faith. Nevertheless, due to the lack of a swap, there is usually a netting of the margin due to the holding of positions for the next day in the form of an increased commission on the transaction or the addition of a flat charge on the transaction or account maintenance.