Definition of Swap
Swap is assets, held or added to any trading account for carrying over a position or a fee to carry a position for midnight.
Swaps could be positive and negative. In the currency market the interest is given or deducted for a carryover position at 17.00 Eastern Standard Time (EST) for each trading day. The trade that open prior to (17.00 ) EST then preserved after this time will be taken as carried over positions till next day .On such positions interest will be charged or credited according to the trading positions opened by traders.
One country’s currency bought or sold by traders against the other determines whether it will be a positive swap or negative swap. Swap rate is set through currency rates compiling a currency pair. If the loan rate surpasses the deposit, the swaps are written off from any trading accounts. The positive swaps are credited whenever the activity rates of buying currencies are higher than the sold currencies.
The targets of Forex traders are to get profit by speculative operation with currency contracts. In practical, delivery of currency does not happen. Traders can have the leverage of Brokerage Company and hold their positions as long as they want. If factual delivery of currency is expected, then it must have been finished within two days.
Usually, the brokers carry over the positions to the next trading day automatically. It is essential for the continuation of an existing open position as well as avoiding an actual accumulation of buying currency to trading accounts. Swaps combine with purchasing or selling of 2 contracts with diverse settlement dates on the same terms. In case the positions remain open till day ending, it would be immediately closed an opened, but with a little gap. During trade carrying out currencies bought by traders temporarily deposit in bank. The interest is imposed at these currencies and the sold currencies are taken as a credit with interest.
For example, one opens a trade with pair of USD/JPY, purchasing dollars for yens. If at that point in time the interest rates in the United State are higher, for instance in the USA at 1% and in Japan in 0.3%. The difference will be 0.7%, in case you sell dollars and buy yens, you will have to cover the disparity between the rates.
A three time swap will be added or deducted for trading Wednesday to Thursdays because trade calculations and delivery of currency will be completed on Saturday. Due to bank holidays the settlement date will shift on Monday, so three days swap will be calculated.
Positive swaps permit trader to raise an extra profit. Currency with hefty interest rate variation is actively applied in the carry trade operation for getting only because of rate fluctuation and swap.
Some brokerage firms give the swap-free account facility to their clients. Swap-free account that is also called Islamic account, any currency pair trade could be carried out. But if it is executed midnight, there will be no profit or loss for the trader.