Hold overnight and interest flows:the swap is what the difference owes.
The interest rate differential charged or credited for holding a position overnight, also known as rollover.
Swap rates vary by currency pair and depend on the central bank interest rates of the two currencies.
In plain words
Swap is the interest adjustment made to a position that is kept open past the daily cut-off. Holding a currency pair means, in effect, holding one currency and owing the other, and each carries an interest rate; the swap reflects the gap between the two, and it can be a credit or a charge.
See it move
Interest earned outweighs Interest paid
Why it matters
A trade closed within the day never meets swap; for one held for weeks it can add up to a meaningful part of the result. Brokers publish one swap rate for buying and one for selling each instrument, and these include the broker’s own charge.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A position has a notional value of 100,000 US dollars; the currency bought earns 4.65% a year and the currency sold costs 1% a year, before any broker charge.
- 1Interest difference4.65% − 1% = 3.65% a year.
- 2Over a year100,000 × 3.65% = 3,650 US dollars.
- 3Per night3,650 ÷ 365 = 10 US dollars.
The raw interest difference is a credit of 10 US dollars a night, and the opposite position would pay that much; in practice a broker’s rates make the credit smaller and the charge larger.
A common mistake
A positive interest difference does not always produce a swap credit. Once the broker’s charge is included, the swap can be a cost in both directions.
Check yourself
Educational information, not investment advice or a recommendation to trade.