A swap (also referred to as a rollover fee) is a fee debited from, or a payment credited to, your trading account when a forex position is held open overnight.
It is one of the key costs, or benefits, of holding a leveraged forex position beyond the daily close, typically set at 5:00 PM New York time.
How is it Calculated?
It is calculated by comparing the interest rates of the central banks associated with the currencies in your trade. Swaps can result in either interest earned or interest paid, depending on the currencies involved and your trade direction.
For example, lets suppose you have taken a trade on the GBP/USD.
Long (buy) GBP/USD
- Bank of England rate > US Federal Reserve rate
- Positive carry: interest earned on GBP is higher than interest paid on USD
If you are long (buy) and the Bank of England’s interest rate is higher than the US Federal Reserve’s, you experience a positive carry – the interest earned on GBP exceeds the interest paid on USD.
Short (sell) GBP/USD
- Bank of England rate > US Federal Reserve rate
- Negative carry: interest earned on USD is lower than interest paid on GBP
If you are short (sell) the same pair, you face a negative carry – the interest earned on USD is lower than the interest paid on GBP.
