In Forex, when you keep a position open through the end of the trading day, you will either be paid or charged interest on that position, depending on the underlying interest rates of the two currencies in the pair. In the examples below, we’ll show you how to calculate the amount that will be credited or charged, factoring in only the interest rates and the broker’s commission, but in reality, the “storage” for holding a position overnight may depend on a variety of factors:
- The current interest rates in the two countries
- The price movement of the currency pair
- The behavior of the forward market
- The dealer’s expectations
- The swap points of the broker’s counterparty
Here’s what we mean when we say storage depends on interest rates:
Let’s say that the interest rate of the European Central Bank (ECB) is 4.25% and the Fed (US) interest rate is 3.5%. You open a short position (Sell) on EURUSD for 1 lot. Here, you are essentially selling 100,000 EUR, borrowing at a rate of 4.25%. In selling EURUSD, you are buying US Dollars, which earn interest at a rate of 3.5%. When the interest rate of the country whose currency you are buying is more than the interest rate of the country whose currency you are selling, storage will be added to your trading account (this may not always hold true, as brokers often charge a fee or markup for overnight swaps). If the interest rate is higher in the country whose currency you are selling, as is the case in this example (4.25 > 3.5), storage will be deducted from your account.
Now let’s say the broker charges an extra 0.25% for the swap. Add this to the 0.75% difference in the interest rates and you get 1.00%. For the position described above, the storage you will be charged will be equivalent to being charged 1.00% interest.
Calculating the swap on a short position: Here we are buying USD and selling EUR. Since the interest rate of the currency we are selling (EUR: 4.25%) is higher than that of the currency we are buying (USD: 3.5%), we will add the Markup in the formula:
SWAP = (Contract × (InterestRateDifferential + Markup) / 100) × Рrice / DaysPerYear
- Contract: 100,000 EUR (1 lot)
- Рrice: EURUSD – 1.3500
- InterestRateDifferential: 0.75% (the difference between the interest rates in Europe and the US)
- Markup: 0.25% (the broker’s commission)
- DaysPerYear: 365 (number of days in a year)
- SWAP = (100,000 × (0.75 + 0.25) / 100) × 1.3500 / 365 = 3.70 USD
When your short position on EURUSD is rolled over to the next day, 3.70 USD will be debited from your trading account for storage.
Calculating the swap on a long position: When we buy EURUSD, we are buying EUR and selling USD. Since the interest rate of the currency we are buying (EUR: 4.25%) is higher than that of the currency we are selling (USD: 3.5%), we will subtract the Markup in the formula:
SWAP = (Contract × (InterestRateDifferential – Markup) / 100) × Рrice / DaysPerYear
- SWAP = (100,000 × (0.75 – 0.25) / 100) × 1.3500 / 365 = 1.85 USD
When your long position on EURUSD is rolled over to the next day, 1.85 USD will be credited to your trading account.
Please Note: When the difference between the interest rates is smaller than the broker’s commission, you will be charged storage for both Buy and Sell orders.
Calculating the swap for stock index CFDs: In our example, we will calculate the swap for keeping a short position open overnight on the ASX200 index.
SWAP = ((InterestRateDifferential / 100) / 360) × ClosePrice × Lots × Contract, where:
- InterestRateDifferential — -3
- ClosePrice — 5815.5 (the closing price of the order)
- Lots — 10 (the order volume)
- Contract — 0.5 (the size of 1 lot)
SWAP Short = -3 / 100 / 360 × 5815.5 × 0.5 × 10 = -2.42 AUD.
Calculating the swap for commodity CFDs: In our example, we will calculate the swap for keeping a short position open overnight on the NG instrument.
SWAP = Swap in pips × Lots × PipValue, where:
- Swap in pips – -0.260
- Lots — 10 (the order volume)
- PipValue – 1 (the value of 1 pip in USD)
SWAP Short = (-0.260) × 1 × 10 = -2.60 USD.
The swap rate for metals can be calculated in the same way as for currency pairs.
In the Forex market, when a position is held open overnight from Wednesday to Thursday, storage is tripled. This is because a swap involves pushing back the value date on the underlying futures contract. For a position opened on Wednesday, the value date is Friday. When a position is kept open overnight from Wednesday to Thursday, the value date will be moved forward 3 days, to Monday (skipping over the weekend). Storage is tripled because you are being paid or charged interest for 3 days instead of just one.
Triple storage is also charged for keeping positions on commodity CFDs open from Friday to Monday.
Source: alpari.com, “What happens when I leave my Forex positions open overnight?“