The agreement to borrow one currency and lend another currency at an initial date and then their exchange at maturity is called Foreign Exchange Swap. This buying and selling is a simultaneous process. The amounts that are swapped are used as collateral. Collateral is offered as a property to the lender, which works as security for the loan. It is a strategy used to get a loan that protects the potential loss.
It is also defined as “The difference in the banks’ interest rates issuing the two currencies, charged to keep the trading position open overnight.”
The interest rate is the rate of currency that which central bank lends to other banks. Its prices keep on changing throughout the year. The central banks determine the key interest rates. The starting value is determined during the first meeting of the year. Here learn more ecn brokers.
Positive and Negative Swap
The swap will be negative if you are responsible for paying it. And the swap will be positive when paid to you or transferred to your account. When the swap has a minus sign, the transactions in your account will tend to cease with the withdrawals of funds.
The swap sign will be positive when the difference in interest rate gives a positive sign. Instead of withdrawing the funds, will deposit the money in your account.
Foreign Currency Swap day
The currency swap operation will come into action when the client has an open position at the closure of the trading session. The client itself is not closing or opening the position. Rather, it is a simultaneous opening and closing for the new day.
This operation is tripled for Forex Currency Pairs from Wednesday to Thursday night. It is called Triple Swap Day. The arrangements for exchange on a position open on Wednesday are made on Friday. Thus, the calculations are done for the next trading day, which is Monday.
Calculation of the Swap
When buying a currency pair, the swap is calculated by the subtraction method. The interest rate of the base currency is subtracted from the quote currency.
When the base currency rate in the central bank is higher, the swap will be positive. And if the rate of the base currency is higher, the swap will be negative.
For example, we are buying EUR/USD with 2% and 1% interest rates, respectively. The swap will be positive for holding the positions open overnight. It will be about 1%.
2 % – 1 % = 1 %
In reverse conditions, when we sell EUR/USD pair, we buy the U.S Dollar and sell the EURO. We will get a negative swap of 1%.
1 % – 2 % = –1 %
Today, no one uses conventional formulas to calculate the swap. Digital tables and FX swap calculators are available these days. Every reliable broker provides these facilities.
Possibly, forex swap is one of the least understood terms in forex trading. This article enables you to understand this term very well. Interest rate, positive and negative interest, and swap calculation are described here very well.
This article provides much useful information about forex trading and focuses particularly on forex trading swap. We hope you have learned much useful information from this article.
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