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Swap means to swap, exchange. But for Forex investors it is more than just a term. Swap is a very important nuance that many investors mix and even sometimes do not realize. This concept, in fact, is the creator of the positive and negative situation in your account.
More precisely, swap is the nightly shipping costs that are positive or negative to your account because of the difference between the currency pairs you've made. That is, if you have put the high interest rate of two currencies out of the market and decided to keep the low interest rate in your hand, the cost of low interest rates will be reflected in your account at night.
  • Swap operations are entirely based on the lending of the money borrowed from borrowing money.
  • With a simple example of buying a pair of EUR/USD, buying a long position, you get the dollar to the market and you get the low interest rate for the euro. This transaction will return to the investor as a negative exchange rate swap. When you sell the EUR/USD, you have to give the dollar to the market, meaning you've bought the dollar. Because you put down a low-interest currency unit, you'll also earn favorable swap revenue.
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RahmanSL avatar
RahmanSL 5 Paź

Good educational article

mcquak avatar
mcquak 7 Paź

Thanks for reminding me Wed swap specials!

BIGBO avatar
BIGBO 12 Paź

Very good job!

Yonggi7 avatar
Yonggi7 30 Paź

Well done!

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Fx Swap and Forward Market
As we all know, our positions in the FX market are liable to either a credit or a debit at the end of each trading day. Known primarily as Carry, swap or rollover the charge made to the trading account is dependent on interest rates. Before we go further, we need to understand what an FX swap is, It is the buying/selling of a spot currency pair, while simultaneously selling/buying a forward contract of the currency pair of the same value.
The FX swap market is the biggest single market in the world, taking up about 40% of the FX markets, which is by far the largest in the world by asset class
To understand the idea here, we need to know about interest rate parity, while there is a pretty basic formula, the idea is as follows. If one country has a higher interest rate than the other country in the trade, then it is feasible to suggest that I could buy the higher yielding currency by selling the lower yield one and park it in risk free deposits and receive a return, this is the entire concept of the carry trade.
However, to prevent arbitrage, buying a currency pair in the future must discount this.
As we can see above, this is the forward curve for the AUDU…
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Daytrader21 avatar

Thanks again for reinforcing some basic concept that I almost forgot. Your article are always very informative. keep up the good work

Airmike avatar
Airmike 21 Mar

very nice article. best of the bests :)

mimuspolyglottos avatar

Another financial HAIKU from Adrian. Short, deep, impressive. Thank You very much. Why are British so good in teaching high finance but are not good in teaching football? :(    I do not know about today but thirty-twenty years ago some theories  have considered  the forward rate as the best  forecaster of currency's rate in the  future. May I consider my portfolio of currencies with positive swap points and with future rate hike expectations on more than half of them as ALPHA trade ( trying to create some analogue to stocks)? Best Regards.

AdrianWS avatar
AdrianWS 24 Mar

Hehe Mimus - thanks for the kind words. Interesting you mention that last point... Normally people consider FX markets Zero-sum, and while the transactions are. Every trade (as highlighted above is exposed to interest rates) as such, they are receiving cash flow, so over time FX strategies (such as G10 carry trades) have outperformed a 0% return for all parties, which is an odd thing to think about but its true! However most don't consider generating alpha as an FX tactic, but its perfectly valid imo and works percectly.P.s. Have you not seen Southamptons academy? really good at training.

Maria_r avatar
Maria_r 26 Mar

large information flow

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