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12. What are Swaps?

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Aayush Jindal

swaps explained

A Forex swap is interest that you either receive or pay at the end of each trading day for holding open positions in the forex market. It is also known as rollover interest or cost to carry a trade. A swap is the overall cost involved in borrowing a currency and lending another over a period of time.

When you open a trade whether it be buy or sell, you buy/sell the base currency with the quote currency. Both currencies are from different countries and may differ in the interest rates offered by the respective central banks. You earn or pay interest on overnight positions irrespective of the direction. Swap rates are calculated based on the interest rates of the countries involved while trading a currency pair.

Positive and negative swaps

You earn swaps when you buy a currency pair in which the country of base currency has higher interest rate compared to the quote currency. For example, when you open a long NZD/USD position, you buy New Zealand Dollars against the US Dollar. The interest rate in New Zealand as of writing is 1.75% and in the US it is 1.25%, in this example there is a positive interest rate difference, which means you earn swaps when you buy NZD/USD.

On the contrary, when you open a short position of NZD/USD you're ultimately selling the New Zealand Dollars and buying US Dollars. This means you're going to hold a currency with less interest rates and have to pay swaps in order to carry a short NZD/USD position overnight. For example, for USD/CHF the lending interest rate in the US at present is 1.25%, and in Switzerland its -0.75%. If you open a long USD/CHF, you earn positive swaps as the interest rates in the US are high. On the other hand, if you open a short USD/CHF you pay swaps and lose money on holding positions overnight.

Positive swaps always add value as you earn money by simply holding an open position. Long term traders always consider swap rates when opening a position since as impacts their equity if a trade is open for a long time. Short-term traders or scalpers often do not bother about swaps as they don't hold an open position for an extended period.

Note: If you carry an open position over the weekend, you receive/pay swaps for 3 days on Wednesday.

Swap rates

Swap rates change from time to time and they can vary depending on factors such as market conditions, economy conditions, policy decisions and risk management. In order to view swap rates at Titan FX, open the MT4 platform and do the following:

  1. In the market watch window right click on a currency pair
  2. Select specification for the menu list
  3. A specification window will appear - scroll to the bottom to see long and short swap points

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