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What are swaps?

by Jun 29, 2020Trading Guides

What are swaps?

The swap is essentially a fee for holding a position overnight. Generally, this fee is to do with the central banks’ interest rates of the underlying currencies quoted in the currency pair with brokers possibly adding an extra commission on top of swap. This fee can either be debited or credited to your account depending on the interest rate differential.

For example, let us take the GBP/USD. If we are long the currency pair and the central bank interest rate for the UK is higher than the US’ central bank, you should experiencing something called a positive carry – where the interest rate received from holding the GBP position long is higher than the interest rate paid holding the USD short.

In contrast, if we were short the currency pair we would experience a negative carry – where the interest rate received from holding the USD position long is lower than the interest rate paid holding the GBP short.

 

 

 

 

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