Swap Rates. Why you should not be afraid of them

So, what is swap in Forex

Swap is the difference in interest rates of two currencies that can be credited to the account or charged from the account, if the trading position remains open till the next day. The swap can be both positive and negative.

Why do we pay to have a open position over night?

Firstly, we do not want to get real currency delivery. Let’s say we bought the pair of EUR / USD. Our task is not to physically sell the euro and buy the dollar. We are only interested in some speculation with a currency pair. We are only interested if the price will go up or down, depending on our position. Since we are just speculating, our position (our order) is transferred to the next day without delivery of real currency. And swap is charged at the time of the transfer.

Let’s look at an example. Suppose we buy EUR / USD. In fact, we buy Euros and sell the dollar. If the interest rate for the euro 2% and 1% on the dollar, then during the rollover (transfer of positions to the next day), you will receive a positive swap around 1%.

2% – 1% = 1%

And if we sell the pair EUR / USD, then we buy the dollar and sell the euro. If the interest rate for the euro 2% and 1% on the dollar, then the rollover swap is negative

1% – 2% = – 1%

Why this interest charged?

When we sell the dollar, because we do not have it initially, we take him on loan. And, accordingly, we pay for it credit interest rate of 1% if we keep our position when moving to the next day. If we sell what we do not have, we pay the interest rate for the use of borrowed funds.

Why do we get a certain percentage, depending on the interest rate? Why when we buy a currency, we get payed extra (positive swap)?

The fact is that when we buy Euro for example, we will automatically agree to the fact that our position can be used to provide credit to sell the Euro to other investors. Thus, when we buy something, we get the interest rate. And when we have something to sell, we pay the interest rate for the loan since we were allowed to sell what we did not had. And this difference in interest rates is called swap. Now we hope you understand and if you have any questions, please Contact us.

If you are interested in learning even more about different aspects of trading Forex, we recommend having a look in our Forex Education section.



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