Swap operations on Forex market is a simultaneous opening of two opposite positions with different settlement dates, one of which closes opened position and another one immediately opens it. Swap rate and cost is set at the moment of trade execution. It means that it is a combination of two opposite trades with equal amount of money and different settlement dates. The target of swaps is carrying an opened position over midnight. Swaps can be positive or negative. It depends on difference in interest rates.
Executing a trading operation, the bought currency of a currency pair is taken as a deposit and the sold one as a credit. As no one knows the period of holding a trading position, deposit and credit accruals are implemented when the position is carried over midnight. Swap accrual to a trading account or withdrawal from it depends on difference between deposit and credit interest rates. If deposit rate exceeds credit one, swap is accrued to a trading account. If credit rate exceeds deposit one, swap is deducted from a trading account. We will use interest rates of central banks as an example for swap calculation. So the interest rate of the European Central bank is 1%, the US Central bank – 0.25%. Purchasing or selling of 1 lot of EUR/USD (in InstaForex – it is 10000 units of basic currency, in this case EUR) at a rate of 1.2310. Swap will be: per year - ((1% – 0.25%) * 10000 * 1.2310) / 100% = $92.325, per day $92.325/365 = $0.25. If we open a long position (buy) with EUR/USD there is an opposite situation: borrowing of euro at 1% annually and depositing in US dollar at 0.25% annually. The credit rate exceeds the deposit one, so the trading account will be charged with $0.25 daily.
Carrying over a position from Wednesday to Thursday, a triple swap is acrrued/deducted. It occurs because a position opened on Wednesday has a settlement date on Friday. Carrying over a position from Wednesday to Thursday the settlement date should be increased from 1 day to 3 days till Monday. That is the reason why triple swap is credited/deducted. On the basis of interest rates’ difference there is a new appeared trading strategy Carry Trade in traders’ community. This strategy is based on getting additional profit in the form of positive swaps. It works perfectly with the currency pairs which have maximal difference of interest rates: NZD/JPY, AUD/JPY and others.
