Foreign Swap Inventory Fee - Interest Calculation

2023-08-30
Summary:

The swap inventory fee in foreign exchange transactions depends on the interest rate difference and position size of the currency pair.

In foreign exchange transactions, the swap inventory fee refers to the interest expense incurred by holding foreign exchange positions overnight. Specifically, when traders hold foreign exchange positions overnight, it means that they have not closed their positions on the trading day and will keep the position until the next trading day. Due to the 24-hour trading in the foreign exchange market and the different interest rates of different currencies, there may be interest differences during the overnight holding of foreign exchange positions.

Swap Inventory Fee

The swap inventory fee is usually calculated based on two main factors: the interest rate difference of the currency pair and the size of the position held by the trader. The interest rate difference refers to the difference in interest rates between two currencies. If traders hold positions in high-interest currencies, they may receive interest income. On the contrary, if a trader holds a position in a currency with a low interest rate, they may need to pay interest fees.


In foreign exchange trading, orders that have not been closed after the end of the trading day will be charged a swap inventory fee. The adjustment inventory fee will only be generated in the case of overnight positions and will be settled on each trading day.


At the end of the trading day, or 00:00 on the foreign exchange trading platform, is its settlement time. It is also the interest generated by foreign exchange traders holding orders overnight, so it is called the swap rate or overnight interest. If investors have already closed all their orders before the end of the trading day, there is no need to charge a swap inventory fee.


In addition, the size of the position also affects the calculation of the adjustment inventory fee. Usually, the larger the position held by the trader, the higher the swap inventory fee.


The adjustment inventory fee can be positive or negative, calculated as a point difference. Its calculation formula is: current overnight interest on buy/sell orders * number of transactions=overnight interest calculated in the quoted currency.


In foreign exchange trading, inventory fees vary depending on the type of transaction. And if the trader still holds open positions on Wednesday or Friday nights, Then overnight interest on Saturday and weekend rest days will be added, and the swap inventory fee will be three times the usual price.


However, the swap inventory fee does not apply to all foreign exchange transactions. Some foreign exchange brokers may choose not to charge adjustment inventory fees but to profit through other means, such as commissions. Therefore, when choosing a foreign exchange broker, traders should carefully understand their charging policies and confirm whether they will charge a swap inventory fee before conducting transactions.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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