swap - definition

A swap (also called rollover or overnight interest) is the interest credited or debited to a forex trader's account for holding a position open past the daily settlement time (typically 5:00 PM New York time). It represents the net interest rate differential between the two currencies in a pair, adjusted by the broker's markup. Swaps apply to all spot forex positions held overnight, but not to CFD or futures contracts that use a different funding mechanism.

Swap = (Interest Rate Differential) × Lot Size / 360

Where: Interest Rate Differential = base currency rate − quote currency rate (or vice versa, depending on broker convention). The divisor may be 360 or 365 depending on the broker.

You buy 1 standard lot (100,000 units) of AUD/USD and hold it overnight. The Reserve Bank of Australia's cash rate is 4.10%, while the US Federal Reserve's rate is 5.50%. The interest rate differential is −1.40% (AUD lower than USD). Your swap = (−0.014 × 100,000) / 360 = −3.89 AUD per night. You are charged approximately 3.89 AUD for holding this long position overnight.

• JPY pairs: Japanese yen pairs use a 365-day divisor instead of 360, which can make swap costs slightly higher or lower than expected.
• Triple swap Wednesday: Most brokers apply triple swap on Wednesday nights to account for weekend settlement, so holding through Wednesday incurs three times the normal swap amount.
• ASIC regulation: Australian brokers regulated by ASIC must disclose swap rates clearly in their product schedules, and some offer swap-free (Islamic) accounts for clients who cannot receive or pay interest for religious reasons.

• carry-trade
• interest-rate
• halal-account
• rollover