What are swaps and how are they calculated?
Now let’s figure out what fx swap is.
A foreign exchange swap is the difference in the interest rates of the banks issuing the two currencies, which is credited to or charged from the account when the trading position is kept overnight.
The central banks of each country determine the key interest rate. This is the rate at which the central bank lends to other banks. This rate may change throughout the year. But its starting value is determined at the first meeting of the central bank of the year. Well, forex brokers are providing awesome offers for this new year. Like, LiteFinance offering a contest called New Year Promo 2020, and they are committed to providing all the Apple accessories to the winners.
On the foreign exchange market currency pairs are traded. Two different currencies are involved in the transaction, and each of them has its own interest rate.
The currency pair contains the base and the quote currency. The former is the currency we buy and the latter is the currency we buy it with.
The base currency is also called the deposit currency. This is our currency and the exchange uses it on a daily basis. Therefore it must pay us a certain percentage for it.
The quote currency is also called the counter currency. It belongs to the bank and we borrow it from the bank. Therefore we pay interest to the bank for the use of its currency, like with a consumer loan.
A swap is negative when you pay it or positive when it is paid to you.
If there is a negative swap (with a minus sign), it’s crediting to your trading account will end when you withdraw the funds (points). If the difference in the interest rates gives a positive swap, the money will not be withdrawn from your account, but rather a certain number of points will be credited.
Thus, if the client has an open position at the close of the New York trading session, a currency swap operation is enforced. This means the position is simultaneously closed and opened for the new day. But on the client’s account, there is no actual closing and opening. Rather the credited or charged interest is simply displayed.
However, there is a day when this operation is tripled. This is called a triple swap day. For forex currency pairs, this is Wednesday to Thursday night. This is because settlements on the exchange for a position open on Wednesday are made on Friday. Therefore, the calculations for the position carried over from Wednesday to Thursday are done for the next day. And the next business day after Friday is Monday. This adds up to 3 days.