Swap and Rollover Charges

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swapWhen you deposit money at a bank you receive some form of interest on your deposit.

Something similar occurs when you trade FOREX on margin. At the end of each calendar day if you have any trades that remain open an interest will apply on these open positions.  This is because your open trades Rollover to the next day. This form of interest is called Swap.

It is called Swap because it involves an exchange of funds or interest rates between two parties.

How is Swap calculated:

The Swap rates depend on the current interest rates of the two currencies involved in the currency pair been traded plus an additional mark-up the broker may apply as an extra cost.

Major Central Banks Overview
Central BanksCurrent Interest RateNext MeetingLast Change
Bank of Canada1.000 %12-03-2014 – 15:0009-08-2010 – 13:00
Bank of England0.500 %12-04-2014 – 12:0003-05-2009 – 12:00
Bank of Japan0.100 %11-19-2014 – 03:0012-19-2008 – 05:27
European Central Bank0.050 %12-04-2014 – 12:4509-04-2014 – 11:45
Federal Reserve0.250 %12-17-2014 – 19:0012-16-2008 – 19:15
Reserve Bank of Australia2.500 %12-02-2014 – 03:3008-06-2013 – 04:30
Reserve Bank of New Zealand3.500 %12-10-2014 – 21:0007-23-2014 – 21:00
Swiss National Bank0.000 %12-11-2014 – 08:3008-03-2011 – 07:00

The table above shows the major currencies’ interest rates as of 12.11.2014

To estimate what the swap will be you subtract the interest rate of the currency being sold from the interest rate being bought. Then you divide the value by 365 to get the daily interest rate.

Example:

You Buy EUR/USD (Buy EUR, Sell USD)  . The swap interest rate you will receive daily is

(0.05%-0.25%)/365= (-020%)/365 = -0.00055%

If you bought 1 lot EUR/USD (100,000) you would have paid 0.55 EUR (100,000EUR x -0.00055%) at the end of each day as a swap.

Let us say you Sold EUR/USD instead (Sold EUR,Buy USD). In this case you would  have gained every day 0.55.  This is because the interest rate of the currency being sold (EUR) is lower than the interest rate being bought (USD) and hence a positive interest rate difference applies which means you are being charged swap.

Broker’s commission: Within that interest rates differential the brokers will usually subtract an additional percentage to be used as a commission.

Swap in Pips

Brokers will usually provide a table with what swap they offer on each currency pair in pips for either going long or short. The table below shows an example.

swap

If you bought AUD/USD you would have received an additional 0.41 pips (multiplied by your lot size) for each day your trade remained open while if you sold AUD/USD you would have be charged 1.58 pips.

You notice that in EUR/USD you will always get charged swap no matter if you Buy or Sell. This is because it is a CFD and the brokers chose to set the trading conditions and swap commissions to their choice.

Swap Free Accounts: Some brokers may offer accounts that do not have Swap interest rates. These accounts are usually reserved for Muslims as under Islamic finance they should not engage into interest bearing activities.

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