Forex basics 101 - Swap (Rollover)
At Trader’s Way, Prime Online Forex and CFD broker, we encourage our clients to review all the basic info on the market before setting up a live trading account. Here’s a brief recap on Swap and how it applies: If a trader opens a position and does not close it by the end of the same day, the position will be rolled over to the next day. Rollover is achieved by two simultaneous deals: the position closure at the end of the day at a spot rate and the reopening at the beginning of the next day at a forward rate. This mix of two opposite deals in one operation is called a swap. The difference between the forward and the spot rates is called swap points.
The forward rate is based on the idea that amounts in both currencies are paid with an overnight interest rate. The difference between these two rates, or the Interest Rates Differential, results in positive or negative swap points.
Forward Rate = Spot rate x (1 + interest of the quoted currency x days/base) / (1 + interest of the base currency x days/base)
Swap Points = Forward Rate - Spot Rate = Spot rate x ((1 + interest of the quoted currency x days/base) / (1 + interest of the base currency x days/base)) -1) ? Spot Rate x (Interest Rates Differential) x days/base
Interest Rate Differential = Interest of the quoted currency - Interest rate of the base currency
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