A Quick Guide to Forex Swaps: Understanding and Calculating

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.