Forex swap refers to the interest that traders get charged for a trade that they keep open overnight. Every currency has its own interest rate, which is determined by the country’s central bank. Holding the currency overnight basically equals to holding a loan from the respective bank, hence the interest charges.
A swap, also known as a ‘rollover fee’, can be calculated in two ways. Depending on whether the traders’ position is long or short.
How does it work?
According to babypips.com, the formula to calculate Forex swap:
Swap = (Pip value * Swap Rate * Number of nights) / 10
For example, if John goes long on a mini lot of GBP/USD and holds the position for a night with an account denominated in USD.
Pip Value: 1
Swap (long) rate: -3.3154
Swap fee = (1 * -3.3154 * 1 ) = – $0.33
His Forex swap for this trade would be $0.33.
Traders will either be paid or charged interest on the respective position, depending on the underlying interest rate of the two currencies in the pair. Therefore, traders are advised to calculate the swap they would be charged before deciding whether to hold the position overnight.