How to Calculate Forex Rollover Swaps and Rates?

How to Calculate Forex Rollover Swaps and Rates?, FP Markets

What is CFD Trading

Traditionally, we know that currency is a medium of exchange usually issued by governments and generally accepted at its face value as a means of payment.

The value of a currency is mostly determined by the demand for it, just like the value of goods and services on an exchange rate. More accurately, the forex currency market is where currencies are exchanged in forms of currency pairs according to the current values and pricing. The value of a forex currency – and currencies in general – is the result of various factors such as the National gold reserve values. A currency is the reflection of a Nation’s or Union’s economy’s stamina itself on the global forex currency market. Just like a universal economic arena.

The forex currency market can be explained as a global network of buyers and sellers who transfer currencies between each other at an agreed price. The value of a forex currency – and currencies in general – is the result of various factors such as the National gold reserve values. When demand is greater than supply then the value of the currency will most probably increase. The most traded currencies are the ones that contribute remarkably large volumes related to transactions. The global forex market has given to forex traders access to trade forex on CFDs, derivatives, stocks and numerous other products.

A contract for differences (CFD) is a contract that pays the difference between the opening and the closing price of an asset. CFDs essentially allow investors to trade the direction of securities over the very short-term and are exceptionally popular in forex and commodity trading.

 

Understanding Rollover in the Forex Market 

The net interest return that a trader accumulates on a currency position held overnight is the swap charge or rollover interest rate. For instance, if you are buying EUR/USD, EUR/JPY or EUR/GBP, you might borrow in the Euro and buy US dollar, JPY or GBP with the amount. In doing so, you will need to pay interest on the borrowed Euro and earn interest on the quote currency you bought.

The rollover rate converts net currency interest rates into an interest return for the position you hold overnight. A rollover interest fee is calculated based on the difference between the two interest rates of the traded currency pair. If the rollover rate is positive, it’s a profit for the investor, when it turns to be negative, it’s a loss.

The swap in forex is the interest fee that a trader either pays or is being charged at the end of each trading day. When trading on margin, you receive interest on your long positions, while paying interest on short positions.

Normally in the forex market, deposit and credit rates on the same currency differ. The credit rate is usually higher that the deposit rate. That is why forex swap rates for long and short positions on the same currency pair are different.

What’s important to recognize is the arrangement of a currency pair consists of two currencies and, by extension, two countries. Consequently, traders must also consider the country’s respective interest rates.

Short-term interest rates (or base rates) are set by a country’s central bank, such as the US Federal Reserve or the Bank of England. MT4 swaps are calculated based on the overnight lending rates in the interbank market and are provided to Forex brokers on a daily basis from liquidity providers. As a trader, you essentially trade the interest rate differential between the two overnight interest rates.

 

 

Formula for the Rollover Rate 

Calculating the swap rate is often tricky for many who trade foreign exchange, and most, understandably, resort to online calculators. While the online calculation is fast and convenient, understanding the dynamics behind the calculation is time well spent.

Both MetaTrader 4 (MT4) and MetaTrader 5 (MT5) trading platforms deal in points. Decoding these points into a trader’s account value is what tends to cause confusion.

MT4 swap rates can be accessed through the Market Watch tab (Ctrl+M). Right-click the financial instrument of interest (EUR/CAD in this case) and click Specification, as illustrated in figure 1.A.


(FIGURE 1.A)

As you can see, the Swap Long rate for EUR/CAD is -5.43 MT4 points and the Swap Short rate is 0.61 MT4 points.

As an example, let’s assume an account is denominated in GBP, our base currency. To convert MT4 swap points to an equivalent monetary value, trading 1 standard lot size, we divide the swap points by the GBP/CAD exchange rate, which, as of current price, trades at 1.7315 (Ask).

Swap Long = -5.43/1.7315 (3.13 GBP will be debited to your trading account if trading EUR/CAD long)

Swap Short = 0.61/1.7315 (0.35 GBP will be credited to your trading account if trading EUR/CAD short)

To further clarify our understanding, again trading 1 standard lot, let’s look at another currency pair, the EUR/USD, which currently trades at 1.1836 (Ask). The MT4 swap rate for a long position is -3.93 while for a short position we have a value of 0.73 (see figure 1.C).

Using the same formula, only this time trading an account denominated in euros (the same as the currency pair’s base currency), we can calculate the swap values as follows:

Swap Long = -3.93/1.1836 (3.32 EUR Debit if trading EUR/USD long)

Swap Short = 0.73/1.1836 (0.61 EUR Credit if trading EUR/USD short)

The same formula applies to all currencies, such as the Euro (EUR), Australian Dollar (AUD), New Zealand dollar (NZD), Swiss franc (CHF), United States dollar (USD) and Japanese yen (JPY – 3 decimal places).

Holding a position overnight on a Wednesday incurs debits/credits 3 x the normal amount: triple swap. This accounts for the settlement of trades over the weekend as swap rates are not charged during this period but only on business days.                 

 

Example of Using the Rollover Rate

Not all traders close their open trades to the end of a trading session. At FP Markets we understand that traders use a variety of trading strategies which is why we offer very competitive swap rates. This allows traders to keep open positions for extended periods without having to worry about the overnight interest/rollover fee having an adverse impact on their trading account.

Those looking to calculate the rollover rate can use our Forex Calculator which is available on all our trading platforms. Simply choose your account currency, select the financial instrument being traded and enter the trade size. The swaps calculator will then use the relevant exchange rate and display the cost of holding both a long and short position.

The FP Markets Forex Calculator can be used to calculate the following:

  • Pip value
  • Margin and profit
  • Swap rate
  • Currency exchange rate

Whether you are looking to capitalise on short-term volatility or build a diversified portfolio of complex instruments, use the Forex Calculator for quick and precise calculations.

 

Difference between Rollover Rate and Swap Rate 

The rollover rate is the fee – a broker usually charges – of holding a currency pair overnight, just like a contract renewal.

The swap rate – on the other side – is the rate at which interest in the base currency will be exchanged for interest in the quote currency, a swap rate is the interest rate differential between each currency pair. A swap rate can either have a negative or positive impact.

Trading from the positive side of the rollover calculation in long-term forex multiplies the potentialities of making profits for day traders. Traders base their calculations on interest rate equivalence, which infers that investing in varying currencies should result in a break-even situation of hedging, regardless of the currencies’ interest rates.

 

 

Restrictions of Using Rollover Rate

The difference between a trader’s calculation on rollover rate and what a forex exchange charges can differ based on what the exchange considers the short-term interest rate for the respective currencies.

Traders calculate the swap rates for a certain delivery date by considering the net potential profit or loss of lending one currency and borrowing another during the time between the spot value date and the forward delivery date. So, the trader is likely to make returns when he is on the positive side of the interest rollover payment.

When trading forex, traders should always consider the trading time (GMT) of the concerned currency before entering a position and/or calculating swap rates.

Choosing FP Markets as your stockbroking partner

Most people approaching the financial markets for the first time are wary just listening to the various terminologies and the first step becomes hard to take because they may think that forex trading is destined only to professional traders.

The question actually is how to choose a broker to start trading! Firstly, you need to choose a trustworthy and multi-regulated forex broker, adhering to the highest ethical standards in trading and who has several years of successful presence in the financial markets.

First Prudential Markets Pty Ltd (ABN 16 112 600 281) is regulated and licensed with ASIC (Australian Securities and Investments Commission) and AFS No: 286354. The company’s headquarters are located in ASX (Australian Securities Exchange) same building in Sydney. FP Markets will provide you with the best conditions in trading, combining state of art technology (MT4 MT5WebTrader and Mobile App), with consistently tight spreads (from 0.0pips), leverage, personalized sessions with an account manager, a multilingual support team ready to assist you whenever you need. First Prudential Market provides you with a portmanteau of  educational material such as video tutorials, eBooks, 22+ monthly webinars with  financial analysts well renowned in the global stock market, alongside advanced trading platforms including a sophisticated yet user-friendly mobile app to trade the markets from the palm of your hand and a Demo Account

 

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