Swap

What Swap means

Every spot forex trade is simultaneously a purchase of one currency and a loan of another, and spot settles two business days forward. A position held past the daily cut-off must have its value date rolled forward, and the cost of doing so is the difference between the interest rates of the two currencies, adjusted by the broker's markup. If the currency bought carries the higher rate the trader may receive a credit; if it carries the lower rate a debit is applied. The charge is calculated on the full notional value, not on the margin posted.

The cut-off is 5pm New York time, and the swap for that night is applied to every position open at that instant, however briefly. Because spot settles on a T+2 basis, the roll executed on Wednesday evening moves the value date from Friday to the following Monday and therefore covers three days, so a triple swap is charged or credited on Wednesday nights for spot forex. Instruments settling differently, including many index and share CFDs, take their triple charge on a different day, commonly Friday.

Traders see swap quoted per lot per night, separately for long and short, and the two are rarely symmetrical because the broker's markup is applied to both sides. This means that on many pairs both the long and the short swap are negative, and it is why a fully hedged pair of positions bleeds money every night. Swap is the dominant cost for position traders and effectively irrelevant for those flat by the close, and it is the mechanism underlying the carry trade.