Swap
In forex trading, a swap, often referred to as a rollover fee, is incurred when a trader extends an open position through the end of the trading day into the next. This fee represents the cost or gain from the difference in interest rates between the two currencies being traded. The direction of the trade (long or short) and the interest rate differential determine whether the swap is a charge or a credit to the trader.
Swap Calculation
The swap fee is calculated based on the pip value, the swap rate associated with holding the position either long or short, and the number of nights the position is held. The formula for calculating a swap in forex is: Swap = (Pip Value * Swap Rate * Number of Nights) / 10. This formula adjusts the swap rate to a per-lot basis, making it easier to calculate the fee or credit for any size of the trade.
Swap Fee Example
For instance, if a trader holds 1 mini lot (equivalent to 10,000 units) of EUR/JPY (short) with a USD-denominated account. Assuming the pip value is $0.90 and the swap (short) rate is -2.725, the swap fee for keeping the position open for one night would be calculated as follows: (0.90 * -2.725 * 1) / 10 = -$0.245. This example illustrates the swap fee as a charge against the trader for holding a short position overnight.