Definition
SwapA swap, or rollover, is the overnight interest credited or debited when a forex position is held past the daily cut-off, based on the two currencies' rates.
Example
If you are long a pair whose base currency has a higher interest rate than the quote currency, you may earn a small swap credit each night; the reverse position usually pays a debit.
In detail
Spot forex trades technically settle two business days after the trade date. Retail brokers do not deliver currency, so they "roll" open positions forward each day at a set time, often 5:00 p.m. New York time. That rollover involves borrowing one currency and lending the other, which creates an interest payment.
The size and direction of the swap depend on:
- The interest rate differential between the two currencies
- Whether you are long or short
- Position size
- The broker's markup, which is why long and short swaps on the same pair are often both negative
The triple swap
Because spot trades settle two business days later, a position held over Wednesday's rollover typically settles across the weekend. Most brokers therefore charge or credit three days of swap on Wednesday night. Some instruments use a different day, so check the contract specification.
Example
Assume (illustratively) a broker lists a long swap on a pair of −6.50 USD per standard lot per night and a short swap of +2.10 USD.
- Holding 2 lots long for 10 nights, including one Wednesday: 12 swap days × −6.50 × 2 = −$156
- Holding 2 lots short for the same period: 12 × 2.10 × 2 = +$50.40
On a short-term trade, these amounts are minor. On a position held for months, they can be larger than the spread and commission combined.
Swap-free accounts
Some brokers offer swap-free (often called Islamic) accounts for clients who cannot pay or receive interest for religious reasons. These usually replace swaps with a fixed fee or wider spreads.
Why it matters
Swap is a real cost or income that does not show up in the entry price, so it is easy to overlook. Before holding positions for days or weeks, check the swap rates in your platform. The carry trade strategy is built specifically around earning positive swap, while accepting exchange rate risk.
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Related terms
- Carry TradeA carry trade is buying a higher-yielding currency against a lower-yielding one to earn the interest rate difference, while accepting exchange rate risk.
- Interest Rate DifferentialThe interest rate differential is the gap between the interest rates of the two currencies in a pair. It drives swap rates and influences capital flows.
- Central BankA central bank manages a country or region's money supply and sets its key interest rate, making it one of the strongest drivers of currency values.
- LeverageLeverage lets you control a position larger than your own deposit by using borrowed exposure from your broker. It magnifies both profits and losses.