How a Currency Swap Works – FX Swap Examples

How a Currency Swap Works – FX Swap Examples

Now let’s take a closer look at how foreign exchange swap works.

I have already mentioned this above. At its core, Fx swap rates are the difference in the interest rates of the central banks of the two countries whose currencies are represented in the pair.

Above, I gave you the formula to calculate the base swap rate. The main parameters of this formula are basically unchanged during the year. And for some currencies, even for several years.

The main parameters are the values ​​of interest swap rates. Except for the current year 2020, changes in interest rates are not frequent. This happens once a year at best.

The variable parameters are the markup and the quote of the currency pair. These parameters can change even more often than once a day. Therefore, if we want to know the exact value of the swap, we need to constantly recalculate the value using a formula or a special calculator.

In addition to being positive and negative, swap rates can also be long and short positions open. In other words, a buy swap and a sell swap.

In my broker’s swap table, it looks like this:

LiteFinance: What is swap in Forex trading? | How to Calculate FX Swaps: Examples | LiteFinance

These values ​​in the red columns indicate the swap value in points per one full lot, which will be credited to or charged from the trader’s account if you have your positions open. In other words, if we have an open position to sell the AUDUSD pair, when we carry it overnight a swap short is applied to our position, which is equal to -3.216 points. If we have an open position to buy this pair, Swap Long will be applied, and it will be equal to -3.816 points.

The largest swap value is usually associated with exotic currency pairs such as USDRUB.

If you need to know the swap just before opening the position, you can use the contract specification table:

LiteFinance: What is swap in Forex trading? | How to Calculate FX Swaps: Examples | LiteFinance

The situation with swap rates will be slightly different for the euro/dollar pair. The buy swap pip value will be -6.036. In other words, an amount equal to this value per lot will be charged from your account. But the sell swap is equal to 0.392 points. A positive sign means that this value will be credited to your account. So you can actually earn money on a swap.

I have already explained why swap rates can be positive and negative. It’s all about the difference in interest swap rates. If the interest rates of the central banks of currencies differ greatly, then the swap sign will be different when buying and selling.

Calculating the swap fees on a short position

Now let’s take a closer look at how the total swap value is calculated on Forex trading for a sell trade in the EURUSD currency pair.

  • SWAP (short positions) = (Lot * (quote currency rate – base currency rate – markup) / 100) * current quote / number of days in a year.

However, it should be noted that the value will not be entirely accurate since we do not know the exact markup value.

If the positions open at 1 lot with the current quote at 1.19626 and markup at, for example, 0.20%, the swap size will be:

  • SWAP (short positions) = (100 000 *(0.25 – (0.0 – 0.20)/100) * 1.19626/365 = 0.163 EUR with an incorrect markup value.

If you perform this operation using a calculator on the broker’s website, you get 0.376 USD, so the difference is only in the markup value.

Swap on a long position

Now let’s look at how the total swap value is calculated for a buy when you trade Forex using the EURUSD pair.

  • SWAP (long positions) = (Lot * (base currency rate – quote currency rate – markup) / 100) * current quote / number of days in a year.

However, it should be noted that the value will not be entirely accurate since we do not know the exact markup value.

If we open a position of 1 lot with the current quote at 1.19626 and markup at, for example, 0.20%, the swap size will be:

  • SWAP (long positions) = (100,000 * (0.0 – (0.25 + 0.20) / 100) * 1.19626 / 365 = -1.474 EUR with an incorrect markup value.

If you perform this operation using a calculator on the broker’s website, you get -6.036 USD, so the value of the broker’s markup for a short trade is significantly different.

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