What is a currency swap?

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Often, Forex beginners have a question: “Why are some money debited from the account with open poses at night without my knowledge?”  

Everything is simple here, but the fact is that when open positions move overnight, the so-called currency swap is debited from them.

A currency swap is a kind of agreement that includes 2 opposite transactions of equal amounts, which are concluded in 1 trading day. If you work in the forex market, the swap transaction is concluded at 12 am, and if on some other exchanges, then at the close of their trading sessions. Speculators sometimes refer to a swap as “payment for moving positions overnight”.

Hence the question, where do the swaps come from? The trick is that most of the transactions on Forex are spot (Spot), that is, the currency is delivered on the 2nd business day after the opening of the transaction. And so that this condition does not become binding for the player, a swap transaction is concluded (not to be confused with a spot), which makes it possible to settle the obligations of the parties to the transaction.

How do swaps work?

Let’s take an example – just note that all the numbers are fictitious. Let’s say we sell the US dollar (USD) for the Japanese yen (JPY). Let’s assume that the Central Bank’s interest rates are 1O% and 2%, respectively. To make it clearer, let’s also assume that the value of these two currencies relative to each other does not change for the period of time of interest to us. 

So, our trade is a sale of $ 100,000 for the yen. Considering that the base currency in this example has a high interest rate, this is not profitable for us, because even with an open position of just a few trading days, you can be at a loss by several percent. To avoid such a situation, the forex broker, very generally speaking, compensates for this with daily swaps.

And if we imagine the opposite situation, that we are selling yens for dollars, the swap is already deducted from the trader. And this is not very convenient, especially if you work in the medium and long term.

How to calculate the swap?

There are tables for calculating swaps, thanks to which a speculator can easily navigate in which cases you are charged a swap and in what amounts, and in what amounts. 

All these numbers are constantly being adjusted because the Central Bank is constantly changing interest rates. However, there is usually no urgent need for such tables – after all, the system performs swap transactions in automatic mode.

It is important to note that the presence of swaps for forex and other markets is a natural feature and should not make you very nervous.

Moreover, some forex brokers, by virtue of certain agreements with their counterparties, have the authority to cover swaps not at your expense, but on their own, thanks to personal opportunities. If you are confused by swaps – look for just such brokers.

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