Swap my Spot?

As an individual FX trader/investor you are speculating on the future direction of one currency against another. By buying (going long) or selling (going short) you are hoping the value of one currency either appreciates or depreciates against the other.
The OTC (over-the-counter), or wholesale market, is made up of similar speculators and also those institutions that are looking to “hedge” future FX exposure or even take “delivery” of a currency for accounting purposes.
What does that mean? Well think of yourself as an exporter based in the UK. You sell your goods globally and therefore take remittance of payments from your buyers in their local currency. You would have payments in USD, EUR, JPY, AUD, CAD and so on. As you are based in the UK and have costs (payroll, suppliers, rent etc.) you need to convert these currencies into your local currency – in this case GBP. If these payments come throughout the month you are likely to have your Bank convert these currencies at the market rate.
However, there may be occasions where you know a large payment is scheduled to arrive at a specific time in the future. We all know how the price of currencies fluctuates from day to day so it would make sense to “lock in” a rate for the conversion to avoid the “foreign exchange risk”. By doing this you know exactly how much GBP you will be receiving regardless of where the exchange rate is when you receive your payment in the future.
Such a “mechanism” is called FX Forwards when “locking in” a “price” from 1 month to many years in the future. The “mechanism” used for periods shorter than 1 month are called FX Short dates or Swaps.

T+2 or T+1?

The Global FX OTC market works on a standard principle of settlement of trades. Generally most currency pairs traded today are “settled” the day after tomorrow – known as T+2. This means if you were to buy, for example, GBP/USD on a Monday you would receive your GBP and would have to remit your USD to the counterpart of your trade on Wednesday by 3pm London Time. All currency pairs operate on a T+2 settlement date apart from USD/CAD which is T+1 (this is because of the close proximity of Canada to the US and a similar Banking/Clearing principle). It gets a bit complicated over a weekend however. As most settlement/clearing centres are closed Saturday and Sunday it means that if you traded on Thursday you can’t settle on Saturday as they are closed! In this case settlement would occur on Monday for a T+2 pair – likewise a trade done on a Friday would settle on the following Tuesday.

A global Economy?

The economies of all the countries in the world are varied and very different. Some are growing whilst others are receding. As a result of local economic policies countries will use interest rates to help improve their economies. A country that has an economy that is receding (in a recession) will, most likely, attempt to attract investment by foreigners by making the cost of borrowing money for local investment cheap. They can do this by lowering interest rates. Conversely an economy that is growing can use higher interest rates to “control” growth.

Rolling Spot

So, if there are different interest rates in all the varied economies of the world’s countries, it makes sense that there will be times when buying one currency and selling another will incur an interest rate charge. An FX rollover (swap) rate is defined as the interest added or deducted for holding a currency pair position open overnight. These rates are calculated as “the difference between the overnight interest rate for two currencies that a Forex trader is holding whether long (buying a currency pair) or short (selling a currency pair)”.

Why is this important?

Knowing the rollover or swap rate can be important for calculating profits and losses for any positions held overnight. Educate yourself to find out which rate is being charged by your broker and the base currency the interest rate is using. Due to the ever changing economies rollover/swap rates change frequently, so it is important to review what you are being charged regularly if you are considering holding several currency pair positions overnight. Holding positions overnight will result in debits or credits in interest posted to your account.

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