At noon today, I took a look at my brokerage statements, as I do every day, and I once again noticed the swap fees. Many of you are probably familiar with them, but others might not know what I’m talking about.
Since anyone interested in learning more about forex will have to deal with these fees, I thought I’d explain them in greater detail here.
What are swaps in forex trading?
Generally, a swap is an exchange of future cash flows or liabilities. In forex trading, it refers to the exchange of two currencies.
Since several days or even weeks may pass between the exchange of two currencies and the closing of the trade, swap fees (also called rollover fees) are incurred.
Swap fees refer to the interest charged for holding forex positions overnight. “Overnight” means any position opened before 5 pm EST (11 pm CET) and still held beyond this point.
An example from Interactive Brokers
Let’s use EUR/USD as an example and assume for simplicity’s sake that it’s trading at 1.10.
If we hold two lots, our position is worth €200,000. In forex, the standard size for a lot is 100,000 units of the base currency (EUR in our example).
This means that we have purchased €200,000 in exchange for $220,000 (€200,000 x 1.10). However, it’s important to note that due to the leverage offered by forex brokers, traders don’t have to deploy capital of €200,000. Only a fraction of this amount is deposited as margin (collateral) in their accounts. With leverage of 50, for example, the required margin for the trade would be just €4,000 (€200,000 / 50).
For the position in our example, we would not only receive interest (on our long position in EUR) but also be charged interest (on our short position in USD). The broker uses current overnight rates to calculate the rollover or swap rates.
At my favorite brokerage, Interactive Brokers, the swap rates are calculated on a sliding scale according to the value of the trade:
1. Example – EUR/USD
Based on our example of EUR/USD, these rates are:
| Currency | Tier | Interest Rate Paid |
| EUR | 0–100.000 | 0% |
| 100.000,01 + | -0.604% (BM – 0.25 %) BM = benchmark | |
We are long €200,000 and should receive interest on this position, but since interest rates are currently negative, we in fact have to pay interest.
Based on the sliding scale, we don’t receive interest for the first €100,000, which in this case means that we don’t have to pay any negative interest on it. For the remaining €100,000, though, we have to pay interest of 0.604%. In lieu of this payment we receive a negative interest credit of -0.604%.
If we hold the position for an entire year, the fee would amount to €604 (€100,000 x -0.0604). For a position held for a single night, we receive a negative credit of €1.67 (604/360).
| Currency | Loan Amount | Interest Rate Charged |
| USD | 0–100.000 | 1.91% (BM + 1.5%) |
| 100.000,01–1.000.000 | 1.41% (BM + 1%) |
In USD, by contrast, we are short $220,000, which means we have to pay interest. The first $100,000 is subject to 1.91% according to the sliding scale, which results in a fee of $5.35.
For the remaining $120,000, we have to pay interest of $4.70. As a result, we end up with fees of $10 (or roughly €9) for our short in USD and €1.67 for our long in EUR. Combined, we pay around €10.67 for holding two lots of EUR/USD overnight.
2. Example – AUD/JPY
Let’s run through this scenario again with another currency pair and assume we’re holding two lots of AUD/JPY.
Here we once again assume the base currency will appreciate and decide to trade AUD/JPY from the long side. So we’re long AUD 200,000 and short JPY 1,600,000 (assuming an AUD/JPY exchange rate of 80).
| Currency | Tier | Interest Rate Paid |
| AUD | 0–14.000 | 0 % |
| 14,000.01–140.000 | 1 % (BM – 0.5 %) | |
| 140,000.01 + | 1.25 % (BM – 0.25 %) |
Based on the sliding scale, we don’t receive any interest for the first AUD 14,000. For AUD 126,000, we receive interest of 1%, and for the remaining AUD 60,000, 1.25%. This means we’ll receive an interest credit of AUD 5.58 (or approx. €3.88).
| Currency | Loan Amount | Interest Rate Charged |
| JPY | 0–11,000,000 | 1.5% (BM + 1.5 %) |
| 11,000,000.01 + | 1% (BM + 1 %) |
Since our position of JPY 1,600,000 is below the threshold of JPY 11,000,000, we pay the higher interest rate of 1.5% on all of it. As a result, our fee is JPY 66.67 (or approx. €0.58). All told, we receive €3.88 for our long position in AUD and pay €0.58 for our short position in JPY.
This means that at the end of the day, we even get an interest credit of €3.30 (€3.88 – €0.58) for our long position in AUD/JPY
Since calculations vary from broker to broker, let me discuss an additional example from a broker that expresses swap costs in points rather than as a percentage.
3. Example – GBP/NZD using FxPro
Let’s use GBP/NZD as an example and assume we’re short two lots of GBP/NZD. What will this cost at the broker FxPro, which expresses swap fees not in percent, but in points?
We will receive 4.34 points for our short in GBP/NZD based on the following formula:
Swap = (lot size or pip value x swap rate x number of nights) / 10
In our case, this translates to: (€13.20 x 4.34 x 1) / 10 = €5.73
In other words, we get an interest credit of €5.73 for holding a position in this currency pair overnight.
Profiting from interest rate differentials – the carry trade
As the last two examples make clear, in forex trading you can profit not only from changes in exchange rates, but also from interest rate differentials. A position opened to exploit such differentials is called a carry trade. In our second example, we basically took out a loan in JPY and used it to buy AUD.
Since the interest rates for JPY are lower than those for AUD, traders can make a profit by initiating a carry trade. This sounds very easy, but it’s not really a free lunch because there’s always the risk of the exchange rate changing.
For example, the exchange rate can quickly move against you, eliminating the advantage of the interest rate differential. But it’s still interesting to be aware of these differentials, and it’s always worth taking a closer look at the swap fees from this perspective.
Value dates in forex trading
Swap fees are of course always dependent on how long you hold. Trading hours are from Sunday night to Friday night, and it’s important to know that forex is settled two business days after the trade.
The value date is therefore T+2. This means that Wednesday is the value date for trades on Monday, and Thursday is the value date for trades on Tuesday. In this context, Wednesday deserves special attention, because the value date for trades on that day is Friday. As a result, any positions held after 5 pm EST on Wednesday will be subject to a triple swap fee.
This applies even if you open a position at 22:59 and close it at 23:01. In that case, you pay (or receive) the triple swap fee for holding a position for just two minutes.
Public holidays are subject to the same rule. If public holidays fall within the financing period, the financing period is extended until the next value date.
Conclusion on swaps and rollover fees
Swap fees are a cost you should never underestimate. Extrapolated to an entire year, they reduce your performance and are thus an additional cost factor that you need to consider in your trading.
If traders use very high leverage (up to 1:500 in extreme cases), interest costs are so high that success in trading is probably impossible over the medium term. It’s also important to know that you can receive interest credits for certain markets, and that there’s always a position on which interest will be paid.
A swap/rollover fee is charged when you keep a position open overnight. A forex swap is the interest rate differential between the two currencies of the pair you are trading, and it is calculated according to whether your position is long or short.