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A Quick Guide to Forex Swaps: Understanding and Calculating

Updated: Mar 25



In forex trading, swaps play a crucial role in determining overnight costs or profits. Here's a brief overview:


What is a Swap in Forex?

A swap represents the interest rate differential between two currencies in a forex pair. It's the cost or profit associated with holding a position overnight.


How Swaps Work:

  • Positive swaps: Earning interest.

  • Negative swaps: Paying interest.


Calculating Swaps:

  • Formula: Swap = (Contract Size × Interest Rate Differential × Number of Nights) / 100


Example:

For a long EUR/USD position with a 0.25% interest rate in the Eurozone and 0.50% in the US, holding overnight for 3 nights:

  • Swap = (100,000 × (0.50% - 0.25%) × 3) / 100

  • Swap = 75 USD (positive swap)


Understanding swaps helps traders manage overnight costs and optimize trading strategies. Always check with your broker for specific swap rates and policies.

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