Swap for FX products is calculated based on the interest rate differential between currency pairs. Generally, swaps occur when holding a currency position overnight. Let’s use an example to explain the calculation of swaps. For instance, consider the EUR/USD currency pair, with the Euro’s interest rate at 1.00% and the US Dollar’s interest rate at 0.50%.
When holding a long position (buy position):
Assume a trader holds a long position of 1 lot (100,000 units) in EUR/USD and carries it over to the next trading day. Since the Euro’s interest rate is higher than the US Dollar’s interest rate, the trader will receive swap points.
Swap points = Number of lots × Swap point unit × Swap point rate
Here, the swap point unit is usually standard, and the swap point rate reflects the interest rate differential.
For example, if the swap point rate for 1 lot of EUR/USD is 0.0025, the calculation is as follows: Swap points = 1 × 100,000 × 0.0025 = 250 USD
The trader will receive 250 USD in swap points by the next trading day.
When holding a short position (sell position): Conversely, if the Euro’s interest rate is lower than the US Dollar’s interest rate, the trader will pay swap points. Similarly, the swap points are calculated based on the swap point rate.
Swap points = Number of lots × Swap point unit × Swap point rate
For example, if the swap point rate for 1 lot of EUR/USD is -0.0015, the calculation is as follows: Swap points = 1 × 100,000 × -0.0015 = -150 USD
The trader will pay 150 USD in swap points by the next trading day.
Swap points can vary depending on the broker or exchange. Additionally, it is common for three days’ worth of swap points to be calculated on weekends and holidays.
Traders need to consider swap points when choosing the duration and strategy for holding a position. They should also take into account the impact of taxes and fees.
