2023-05-26
In forex trading, overnight interest, also called a swap or rollover rate, is the cost or reward of keeping a position open after the trading day ends. Since trading currencies involves borrowing one currency to buy another, you either earn or pay interest depending on the relative interest rates of those two currencies. This financing adjustment happens automatically when positions roll over to the next day.
The outcome depends on the interest rate differential between the two currencies in a pair.
If the currency you are buying (long) has a higher interest rate than the one you are selling (short), you could receive a positive swap, meaning interest is credited to your account.
If the currency you are buying carries a lower interest rate than the one you are selling, you will likely incur a negative swap, which reduces your balance.
Let’s say you hold a long position in AUD/JPY. Australia’s interest rates have historically been higher than Japan’s, so you may earn interest overnight. On the other hand, going long on EUR/USD often means paying overnight costs, because the U.S. interest rate is commonly higher than the Eurozone’s.
Forex brokers calculate swaps using three main components:
Interest rate differential between the two currencies.
Settlement method, often called Tom-Next (tomorrow-next day).
Broker adjustments, which may include a spread or markup.
It’s also important to note that some days carry a triple swap charge, typically on Wednesdays. This accounts for the interest accrued over weekends when markets are closed but positions still incur financing.
Overnight interest rates aren’t just a technical detail—they tie into larger financial concepts:
Swap points are embedded in forward exchange rates. They represent interest differentials and help ensure that covered interest rate parity holds in practice.
Carry trades involve borrowing in a currency with a low interest rate and investing in one with a higher rate. Traders profit from both interest and potential favorable exchange rate moves.
Economic theories like the International Fisher Effect and interest rate parity suggest that exchange rates may eventually adjust to offset rate differentials. However, in reality, anomalies often allow traders to benefit from these mismatches.
Positive or negative rates arise from the difference between the interest rates of the two currencies in a pair. If the long currency pays a higher rate than the short currency, traders receive interest. If the opposite is true, they must pay. This dynamic reflects monetary policy and market demand.
Brokers calculate swaps using the interest rate gap between the currencies, the contract size, and settlement adjustments. They may also add a markup, which can affect profitability. Rates vary across brokers, so it’s always worth comparing platforms if overnight financing is a key part of your trading strategy.
A carry trade is a strategy where traders borrow a currency with a low interest rate and invest in one with a higher rate. By holding the position overnight, they earn the difference as income. However, exchange rate movements can offset these gains, so it requires careful risk management.
Swap points are the adjustment made to the forward exchange rate to account for differences in interest rates between two currencies. A positive swap point reflects a forward premium, while a negative swap indicates a forward discount. They are critical in forward contracts and influence long-term trading and hedging decisions.
In theory, yes. Models like interest rate parity and the International Fisher Effect suggest that currency values adjust over time to cancel out rate differentials. In practice, however, markets often deviate from these models, creating opportunities for arbitrage, carry trades, and other interest-rate-driven strategies that can last for months.
Triple swap charges usually occur on Wednesday evenings. This accounts for trades that remain open through the weekend, when markets are closed but interest still accrues. Traders should check their broker’s schedule, as rules may differ slightly. Being aware of this helps avoid surprises and manage positions more efficiently.
