The Reserve Bank of India (RBI) has decided to inject rupee liquidity into the system through long-term foreign exchange buy/sell swap — a first-of-its-kind …
www.forexgurukul.com www.fb.com/fxgurukul email@example.com What is Swap Charges in Forex Trading.
Numerix Video Blog: FX Swap Regulation inLimbo – October 12th and Beyond Jim Jockle (Host): Hi welcome to Numerix videoblog, Iím Jim Jockle your host.
October 12 circle the calendars banks have to start countingswaps transactions to see whether theyíll register in December as swaps dealers.
Nowwith me today ñ 20 year FX vet and Vice President of Numerix Client Solutions Group, Udi Sela.
Udi Sela (Guest): Thank you Jim.
Jockle: So April 2011 US Treasury comes outwith a proposal to exempt Forex swaps yet we are pressing on the October 12 date.
Giveus a little background of whatís going on and why specifically FX swaps are proposedfor exemption.
Sela: Sure, so we of course know that postthe subprime crisis the main issue is how to regulate the derivatives market in a waythat incidents like the Lehman Brothers case will not reappear.
Specifically looking atthe FX market one of the most frequently traded instruments is FX swaps.
These swaps are mostlyused for funding.
The big question is, if banks are required to report the FX swapspositions if they have more than 8 billion dollars of nominal amount, and probably beliable to capital charges.
This may have an impact on the trading of FX swaps and thecost for the end clients.
Important to mention and I guess this is the main reason for exemptingthe swaps is that FX swaps are used mostly for funding and not to execute a view on themarket.
When I say funding, it could be funding ofan open position or just funding the balances of banks.
So just to be clear if Iím an Americanbank and I have balances in Euros, Brazilian Real and so forth typically I would use FXswaps in order to cover my balances.
And when I use FX swaps Iím not changing the counterposition of the bank.
So one may ask why I should be liable to additional capital chargeswhen I cover my balances when Iím performing a funding operation.
Jockle: So we hit the date itís now October13 weíre running towards December whatís going on in the bank if the exemption is notpassed by that point.
Sela: That would imply that banks would startregistering the swaps and assuming those large market makers would have additional costsfirst of all capital costs as well as operational costs.
Banks we know do not operate in a vacuumso they would like to charge the banks for this additional cost that would imply thatcorporations, investment firms, ect.
would have to pay a higher price for funding operations.
Jockle: So the cost gets passed through.
Whatabout the market implications itself.
You had a webinar a few weeks ago proposing severalstrategies given the low vol environment of many pairs in the market right now what ifany market moves would happen based on the lack of exemption going forward.
Sela: I would think if the regulations gothrough that weíd see less operations in the market because people would be reluctantto execute trades because they would understand that the trade actually has an additionalcost now which is the funding cost.
So why should I enter in to a position or investmentdecision if I know that I have to make more in order to cover my additional funding costs.
So I would suspect that volatility was decrease further.
Jockle: One last question in this particularvideo blog for the day and Iím looking at a Reuters article from earlier this week coveringthe issue and one of the things that has been tied to this as putting political risk aroundthis has been LIBOR and its consequences and one of things that struck me quoted in thearticle is ìÖThe LIBOR scandal, which a key input to FX swaps valuation was shownto be fraudulent and manipulated by participating banks, shows exactly how problematic thisisÖî give us the role of LIBOR in valuation for FX swaps.
Sela: So I have to admit that I was very surprisedwhen I saw that too because personally I donít see what is the connection between LIBOR andFX swaps.
Iíve traded FX for many years and never priced FX swaps off LIBOR rates.
LIBORrepresents the offering rates London and has nothing to do with pricing FX swaps all alongthe day so that was kind of surprising.
Thereís enough to be said about LIBOR and regulatingand governing in a way that people do not misconduct but it has nothing to do with FXswaps.
Jockle: So maybe Iíll put you in the hotseat and weíll go through another case study around proper valuation in the role of FXswaps going forward.
So thank you Udi I appreciate your time today.
That will conclude todayísvideo blog.
Feedback? ñ Let us know.
Questions you want to hear answered weíll definitelyaddress them and please following us at @nxanalytics on Twitter.
Com and on our blog at Numerix.
Thank you and see you soon.
Udi: Thanks Jim.
SHAUN: Okay, so we are going to go overrollover and what it is.
It's really just the interest that accrues for holding an openForex position.
So when you place a trade, you guys know that we're tradingon leverage, and when we trade the one lot of the euro-US dollar, we're trading100,000 Euros and then we're selling whatever the equivalent is in USD at thetime.
Right now the rate 1.
30, so that means we are buying and selling 100,000Euros and exchanging that for 130,000 dollars.
This is when euro-USD is equal to1.
Make sense so far? Okay.
Now, unfortunately, everybody wants interestand they want their pound of flesh.
And you're not just paying for the money inyour trading account; you're actually owing interest and earning interest for thepositions that you have open.
To use current examples, interest rates are athistoric lows.
And they use the overnight rate for setting the interest rates on aposition.
The euro overnight lending rate is set at 0.
01%, basically free money.
Andthe US dollar has an overnight lending rate of 0.
These are annual rates.
It'sactually pretty equivalent to what you're getting paid on a CD, almost nothing.
Butthat does have a cost associated with it, and when you look in MetaTrader itreferences it as "The Swap".
But in the industry it's more commonly known as"Rollover".
You have to pay interest for the positions that you do have open,because they have value.
When we decide to buy the euro-US dollar, that means weown Euros, and we sold dollars.
In interest terms that means that we areowed interest, and we owe interest.
QUESTION: [inaudible 00:02:35] SHAUN: Right, so if you're buying a euro,and this is in magical fairy land where you earn and pay the exact same amount forrollover, we'll get into the exceptions in a minute, but in the pure scenario you'reonly earning.
01% annual interest on your euro position.
But you're paying.
15%interest on your dollar position.
So if you're buying the Eurodollar, if you heldyour position for a year you would expect to accrue a loss of 0.
14%, which is.
If you did the exact opposite, so if sold the Eurodollar, you're going to onlyowe.
01% overnight interest, but you're going to make.
QUESTION: Are you assuming that youhave a position open the entire year? SHAUN: Yes.
Now, of course, these rateschange.
These are overnight rates, which mean that overnight they are going tochange on a daily basis.
So the amount will fluctuate.
Slowly, but it does fluctuate.
So this is in the hypothetical example where you bought the Eurodollar, theserates never change, and you held the position for precisely one year.
This isbought euro-USD, and sold euro-USD.
You guys following so far? QUESTION: So that's one whole lot rightthere? SHAUN: Yes, this is precisely one lot.
Because one lot is the equivalent of 100,000 base currency units.
Our basecurrency here is the euro.
100,000 of the base currency is 100,000 Euros.
Solet's actually go through and calculate what the rollover would be in our scenarioof buying one standard lot of the Eurodollar.
So here, it's just.
So we have this, the interest, is equal to 0.
100,000 x 0.
0001 = 100Euros.
Of course you have to put that back in dollar terms.
So 100 Euros x 1.
3dollars means you have a debit of 130 dollars for holding the position for anentire year.
It's the same calculation with different numbers.
QUESTION: I thought that was what youget.
SHAUN: Oh, yes, I'm sorry.
Because we bought Euros.
So we only have a credit of 130 dollars for theyear.
The problem is that we're going to owe more for the dollar position, becauseit has a higher interest rate and we sold it.
So, again, same calculation but differentnumbers.
And thank you for pointing that out.
So here we have 130,000 dollars x0.
0015, and this is a negative number because we owe it.
Does anyone have acalculator on their phone? 195? What did I do wrong? Is this supposed to be 13?Okay, 13 dollar credit and 195 dollar loss.
In this scenario 182 is the amount ofmoney we are going to lose after one year in our hypothetical scenario of theEurodollar exchange rate not fluctuating, the overnight interest rate not fluctuating,and us holding our position for precisely one year.
Make sense? Okay.
The nextthing is we need to go over the mechanics of rollover and how it's charged.
It's alittle quirky.
I'm stating the obvious here but there are seven days QUESTION: [inaudible 00:08:06] SHAUN: It doesn't matter.
If you have aposition of 100,000 Euros, you owe 100,000 Euros.
QUESTION: So you owe the interest onthe leveraged amount too? SHAUN: Yes.
It's on the leverage amount,what the interest is calculated on.
So when we open that 100,000 euro position,we did that with 2,000 on 50:1 leverage, or we did that will 1,000 on 100:1 leverage.
But you're not paying and receiving interest on your margin amount, you'rereceiving it on the leveraged amount.
Or paying it on the leveraged amount.
QUESTION: So to do that with MBTrading I'd have to do two blocks.
? SHAUN: No, because the interest is thesame.
You have a 100,000 position.
QUESTION: Yeah but to leverage thatmuch don't I have to double my.
? SHAUN: Yes.
So instead of using 1,000dollars, you use 2,000 dollars to open the one lot trade.
Okay, so, rollover is sevendays a week.
But we know that trading doesn't happen on the weekend.
So inForex trading really happens from Sunday afternoon to Friday.
But this is more of atechnicality, so really the only important days are Monday, Tuesday, Wednesday,Thursday, and Friday.
But they need to charge interest for seven days, eventhough these are the five days that are important.
So what they do is they chargeone day of interest on these days, and then Wednesday by convention and nogood reason, you get charged the interest for Wednesday, Saturday, and Sunday.
QUESTION: Why don't they do thatMonday? SHAUN: I don't know.
Why don't they do itThursday? QUESTION: Or why don't they spread itout across the week evenly? SHAUN: Yeah, why don't you pay one anda half days? That's just the way it is.
So this is referred to as triple rolloverWednesday.
QUESTION: And that's for the pastweekend, right? SHAUN: No, it actually has nothing to dowith weekends.
If you to decide to.
Okay, rollover occurs precisely at 5pm EST.
Sowhen you look at the charts of most brokers, it is based on broker time, butthe Forex industry by convention, this is the start of a new day.
So 5pm EST onSunday is actually the start of Monday.
5pm EST on Monday is actually the startof Tuesday's trading day.
And Tuesday's trading day concludes at 4:59PM onTuesday.
QUESTION: But on Wednesday you getcharged for the past Saturday and Sunday? SHAUN: Even if you didn't have a tradeopen.
If you decide, very poorly, at 4:59 on Wednesday that you're going to opena trade.
Let's write this down.
Wednesday, 4:59 PM open trade.
Wednesday at 5:01 PM, you close the trade.
A total of two whole minutes, youare either going to earn, or pay, triple rollover.
So it has nothing to dowith the last weekend.
They just charge you three times for whatever happens onthat day.
It's a market quirk.
If youhold that position precisely at 5:00 PM, you owe interest.
If you do not, you donot owe interest.
If you had the trade open for 23 hours and 58 minutes, butyou closed it before 5 PM, no rollover.
QUESTION: No triple rollover.
SHAUN: But if you have it at 5 PM, triplerollover.
It's the same concept on Monday, Tuesday, Thursday, Friday,except it's only single rollover.
QUESTION: What's to stop people fromopening trades for 2 minutes every Wednesday? SHAUN: Lots of people try that.
And itdoesn't work, because of spread costs.
You notice that rollover rates are so tinywe're talking about.
01% per annum, divide that by day and it's a silly amount.
It's so negligible that you don't really care.
There are exceptions.
There'sgolden week, and this involves the yen.
There are days where triple rolloverWednesday becomes 9x Wednesday, and you earn the interest for two weeks oftrading.
QUESTION: Do brokers just do that to getpeople to trade with them? Is that a just-for-fun thing or is there an actualreason? SHAUN: It's because Japan actually shutsdown for two weeks.
So anything involving a yen pair in May has goldenweek, where you have monster rollover day.
That's just the way it is.
People dotry and take advantage of it.
When interest rates were higher a couple ofyears ago there was a big differential between the pound and the yen, wherethe pound had an annual interest rate of 5.
25, and the yen had an annual interestrate near 0, as it still is today.
I think today it's.
1, but the point is that therewas a massive difference of 5%, and you could earn that on a leverage position.
QUESTION: [inaudible 00:14:38] SHAUN: Yeah, it does.
Because peoplewant to earn this money.
And this is what drives currency markets, is the actualshift in the interest rates.
People chase yield, so if I can open an account in GBPand I can earn 5%, if I'm holding yen that's looking really attractive to me.
I mightconsider the idea of converting my yen into pounds so that I could make thismoney.
This is actually referred to as a carry-trade.
And it's the idea of using leveragedmoney to earn the difference in interest rates.
It's possible, and it can be lucrative,but the problem is that it depends on your timing of exchange rates.
If you expectthat – think of a realistic scenario today – let's say the ECB decides to reversecourse, and this is not likely to happen at all, but right now they're trying to keeptheir interest rate at almost 0.
Let's say they decided to stop intervening in themarket and to charge a real interest rate.
The euro interest rate would go throughthe roof, which motivates people to put their money into Euros instead of dollars,yen, Australian dollar, whatever.
If you expect that trend to continue for severalyears, then that's a really good motivation for actually buying the currency, becausenot only are you going to earn the increasing differential in the currency, butmore people are likely to follow the trade.
The higher an interest rate is the morelikely people are to buy that currency.
That was actually the big reason behindBrazil's hot market, as of about 2 years ago interest rates were 13-14%.
Everything was appreciating through the roof, so you could buy the Brazilian realand sit back and know that you were going to make 14% in reals.
The problemis that if you top the market, like you did at 14%, you've earned 14% in reals andthen the price plummeted by 30%.
Timing is critical.
But that's the fundamentalreason the market exists.
That's why people trade currencies.
Not just forexchanges of payments, but for speculation.
That's entirely why peopleparticipate.
Because it's basically free money.
And there are all sorts ofexamples.
Oddly enough, in Poland most of the mortgages are denominated inSwiss francs.
The reason was that the Swiss had a very, very low interest ratecompared to what the Polish zloty was charging at the time.
If you could pay halfpercent, why are you going to pay five percent to have it denominated in zloty?The reason is because the Swiss franc has been appreciating for several years,and now half of Polish homeowners are severely under water because the value oftheir loans has appreciated by 20-30%, and they only make their income in zloty.
That's the risk of the market, and those are real world examples of why peopledecide to participate and why rollover is really important.
This is the electronicform of how it applies to our traders, our customers speculating in markets.
Thereal mechanics behind it are more tangible, like in the mortgage example.
Seven days a week, rollover, timing, I think that's everything.
Do you guys haveany questions on it? QUESTION: So is it common forstrategies to try to keep track of "Oh I wouldn't make money right now, so I wantto hold my trade at least until I hit my interest point for the day"? SHAUN: You could, but it's a silly risk.
Ifyou think that it's dangerous to be in now, you're going to stay in risking in theEurodollar an average of 120 pips of movement so that you can capture theequivalent of quarter pip.
QUESTION: Is that something that astrategy.
your current interest rate.
Because that's something the strategyhas access to at the market level, to be able to go out and query that.
So it has tobe fed that value from some other source, which means it has to.
SHAUN: Nope, it just has nothing to dowith back testing.
Nobody makes assumptions about rollover; it's notpresent on MetaTrader on a historical basis.
It is available in Real Time, and Ican show you guys where to find that.
It's not something that most people look at aspart of a strategy.
It is an important part, but it's not.
It shouldn't be the maker orbreaker.
It should kind of a little bit of juice.
You use it to pad margins a little bit,where it might be a drag on performance.
It should not be the primary reason whyyou're entering a trade now, at 4:59, so you can capture the tenth of a pip ofinterest cost, and you pay two and a half pips in the process.
The one thing that Ialso wanted to point out too is that everything I explain is kind ofhypothetical.
So you either lose.
14 %, or you make.
14% on an annual basis.
Well,in reality, that's not how most brokers work, and it's a good way that they padtheir margins.
This is how they make a slight amount of money for traders thataren't trading, is the difference in the rollover rates that they charge.
In theexample that I sent you, and assuming that we all did MetaTrader and it was aperfectly equal market, you would see that buying costs you.
MetaTrader showsyou dollars, but I'm just going to put it in a percentage.
This one has 0.
01%, andthis one would be -0.
This assumes that you're buying.
If you net that out youwould expect the total return to either be -0.
14% for buying, or selling to be 0.
But what happens most of the time is that everything gets skewed against you.
Sothis becomes a bigger number, it might be something like 0.
2%, and this onebecomes a smaller number, like 0.
I'm making this up, it's totally depended bybroker.
QUESTION: So you're saying that thebroker does this? SHAUN: Yeah.
It can be the broker; it canbe liquidity provider behind the broker, but yes.
The interest rates are market set,and then they get shifted and obviously someone is earning that differential.
QUESTION: So obviously these are withinthe bounds of legal priorities based on trading rules and.
? SHAUN: Yes.
QUESTION: They can slide it by a coupleof points? SHAUN: It is a cost, and I don't know ofanybody that discloses it.
I don't know who the ultimate beneficiary is, to behonest.
QUESTION: Well, the broker.
SHAUN: That is my assumption, is thatthe broker is making that.
And if they net their trades, they should be capturing thatdifference.
If you have 50,000 clients and most of them are piled into the Eurodollar,there's only going to be a certain amount net exposure.
You're only going to havemaybe 10% of that total difference is actually long or short.
So you can net outthe difference between these two, and keep all of it.
I mean that's not superlucrative, but it's money sitting there and they take it.
QUESTION: A dime times 50,000 islucrative.
SHAUN: It adds up.
QUESTION: Especially when it's allelectronic.
QUESTION: This may sound behind thetime, but I thought that politically they were pressuring the Eurozone to ease? SHAUN: They are.
QUESTION: But they are already waybelow the dollar so.
? SHAUN: Yes.
Well, the target headline ratein the Eurozone is 1.
25%, which is the result of the central bank intervening.
They're buying Spanish bonds, Italian bonds, basically the bonds that literallynobody wants; they're buying them so that the interest rates go down.
And thenin overnight lending, the markets are reacting to that.
Maybe if I'm going to loanmoney, you have to make the call for your business, for your multinationalcorporation and decide do I want to tie up money and jump dead for a year and getsix percent in Spanish bonds, or do I want to loan it to the ECB directly and get paidalmost nothing, but at least I know I'm going to get my money back.
QUESTION: Well it depends on how longyou're going to depend on being in it, and what you think the future is going to turn.
If you think that's going to turn, then go ahead and camp on it now and get it fornothing, if you can afford to be in it that long.
SHAUN: Yes, that's why there are interestrate curves.
That's a whole different subject.
But there's an interest rate curveand it always, well it's supposed to look like this.
Usually it looks more like that,where you have.
So if you lend for a day, and let's use the US Treasury market asthe simplest example, here are bills.
Bills are anything with about a 90 day coupon,so you can loan money to the treasury for a month, 90 days, six months, then youcan buy a one year treasury note, a two year, a five year, and a ten year.
Eachduration is supposed to get higher, but the further out you go, and then the 30 isgoing to be something like that.
The further out you go, you're supposedto get a higher rate of interest, but it's going to be rather negligible compared tothe duration.
The difference between overnight and three months is prettysubstantial.
The difference between a 10 year and a 30 year, hypothetically, issupposed to be more substantial, but obviously the time involved is almostbeyond comparison.
That's why in the example for rollover I cited that theovernight rate is this.
Because that's what you're using in the Forex market, butwhat people are really looking at when they're deciding whether or not to takeout mortgages or to loan money in different sovereign bonds, they're lookingat one year yields, 10 year yields.
QUESTION: It almost seems like it doesn'tmake sense to go past 10 years, because three decades is a long time to tiesomething up.
SHAUN: In that market I would agree.
Butthere were people in the 1970s that caught the US treasury in the height ofthe stagflation when interest rates in the US were at 14%, where they loanedmoney to the US government when the short term rates were actually inverted.
The yield curve actually looked like that, and people were taking the real easymoney over three to six months earning 17%, but the smart money blocked upthose interest rates at 14% for 30 years.
They made 14% per annum, compoundedfor 30 years.
The guys who bought the 30 years made a killing and absolutely asclose to risk free as you could get at the time.
Today I would argue that's suicidebecause I don't think the dollar will be around in 30 years, but that's a differentstory.
QUESTION: When do these costs getcalculated? So every day at 5:00 PM they say "You gained 2 cents" or whatever, butwhen did that fee get charged? SHAUN: Interest rates are a reallycomplicated subject and they're actual the result of a huge scandal right now that Iknow none of you know about, and none of the people I know know about, buteverybody should be up in arms up and it's Libor scandal.
Libor is whereovernight interest rates are set.
It's not a free market and it's actually voted on by agroup of, I think, 30 banks.
It's all the normal culprits.
The people that aredespised, and rightfully so, the Goldman-Sachs of the world, theBarclays, RBS, Bank of America, any bank that you've heard of that's internationalthey're probably one of the banks that set the Libor rate.
So they all get to vote anddecide what the interest rate is for the US dollar tonight.
When they set the ratethat's what every bank in the world uses to set it's overnight lending rate.
QUESTION: Do they just pull it out of thinair or do they base it on something? SHAUN: They pull it out of thin air.
Theysay "I think it's this, I think it's this" and there is a formula for we're going to throwout the most extreme ones and we're going to go with the ones that representthe middle.
It's the most important market in the world because it affects everythingthat connects the money.
It affects stocks, it affects real companies, itaffects bonds, it affects mortgages, it affects currencies, it affects everything.
What happened this summer was the Bank of England actually got caughtencouraging Barclays to nip the Libor rate.
As you can imagine, banks have astrong interest in voting whether the Libor goes up or down, because that isgoing to affect all sorts of things.
Like how much do they have to pay savers inthe CDs, how much do they have to charge for a mortgage, how much arethey going to lose if all of the mortgages that they've sold out over the last decadeto non-existent people, or people who have a pulse and no income, if theinterest rates go too high they are likely to default.
They have all sorts ofmotivations for keeping those interest rates as low as possible to benefitthemselves, and that's what happened.
The banks have this big audit trail ofcolluding with each other to say you vote this, I vote this, you vote this, I vote this,with the effect of pushing the overnight rates down and stealing, effectively, fromsavers.
It's not some conspiracy theory, it's all in Financial Times and it was amassive scandal in England.
In the US most people have not even heard of it,even though we're all the victims of it.
QUESTION: When did all of that start? SHAUN: I don't know when Libor started,but it's been the convention for at least 30 or 40 years.
It stands for the LondonInner Bank Open Rate or something like that.
Anyway, it's set in London butobviously that doesn't really matter anymore because all the banks areinternational.
That's the effect though; it's really just a committee.
QUESTION: With no governmentregulation or anything like that? SHAUN: Actually, it was with the activecollusion of the Bank of England and the Federal Reserve.
They were encouragingall of the banks to keep the interest rates low because it happens to align with thepolicies of said central banks.
There's many opinions out there that the centralbanks exist for the benefit of the banks that are on their committees that ownthem anyway.
QUESTION: So what should be thedeterminant of it in a perfect world? SHAUN: The free market.
If I want to loanmoney to Joe, it should be bid and ask.
If I want to receive 5% interest on my USdollar deposit, then I should have the ability to sell it.
QUESTION: Demand and supply.
It's not a market.
QUESTION: How did we get away fromthat into this? This seems like OPEC or something.
SHAUN: Yeah, that's basically what it is.
It's the same thing.
QUESTION: Yeah, I'm just ignorant aboutit.
SHAUN: Most people don't know aboutLibor.
It's probably the most important financial organization that you've neverheard of.
QUESTION: The best kept secret.
SHAUN: And I'm sure that's not acoincidence.
QUESTION: So if you Google this, youwon't find out anything you just said? SHAUN: Yeah, type in Libor scandal.
Youwill see it.
QUESTION: And the FBI will be knockingon your door.
QUESTION: So how is it kept secret? SHAUN: It's not kept secret.
QUESTION: It's not advertised.
SHAUN: It's just most Americans don'treally.
What's a Libor, what's an interest rate, you know? It's just not somethingthat apparently the American media finds worthy of news.
QUESTION: Well, it's probably a little bitof collusion between the media and the market.
SHAUN: I'm not going to be on theInternet advocating conspiracy theories.
But I will say.
QUESTION: Oh, it's a theory, is it? Youwere the one who said conspiracy.
SHAUN: I'm just saying Libor exists, that'sthe structure, draw your own conclusions.
Do you guys have any otherquestions? Rollover, Libor, interest rates? QUESTION: Now that I'm verydisheartened, no, thank you.
Hang your heads, go cry.
What are Swaps? Swaps are a procedure that is performed inorder to avoid taking physical delivery of a currency.
Most speculators never intendto take delivery and are only looking to gain on the fluctuations in price.
Because of this,there is a daily swap procedure also known as "rollover".
In the interbank market, positions are simultaneouslyclosed and opened at a slightly different rate to account for varying exchange ratesbetween countries in which the currencies are being traded.
In the retail foreign exchange market, mostbrokers simply debit or credit the amount to avoid confusing a new position with theoriginal position.
This is the way most retail and institutional traders prefer the processto be handled.
How Swaps affect you as a customer.
Depending on what currency pair is being held,swaps can have a negative or positive effect on a trade.
As an example, somebody holdinga long AUD/JPY position would collect positive swaps since the interest rate in Australiais much higher than the interest rate in Japan.
If a trader is short AUD/JPY, they would receivenegative swaps on that position.
Traders need to take this into account when deciding ona strategy.
What benefits do our customers receive fromour competitive rates? At ThinkForex, we offer very competitive swaprates to our customers.
We are right in line with interbank rates and this can make a bigdifference to a trader.
Many brokers don't give enough positiveswap and charge too much negative swap.
This can really harm a trading strategy.
"Swap"your current broker for ThinkForex and come see the difference.
ThinkForex – The Smart Way To Trade Forex.
In finance, a foreign exchange swap, forexswap, or FX swap is a simultaneous purchase and sale of identical amounts of one currencyfor another with two different value dates.
see Foreign exchange derivative.
Foreign ExchangeSwap allows sums of a certain currency to be used to fund charges designated in anothercurrency without acquiring foreign exchange risk.
It permits companies that have fundsin different currencies to manage them efficiently.
swap contract: swap contract is an agreementbetween two party to exchange a cash flow in one currency against a cash flow in anothercurrency according to predetermined terms & conditions.
StructureA foreign exchange swap consists of two legs: a spot foreign exchange transaction, anda forward foreign exchange transaction.
These two legs are executed simultaneouslyfor the same quantity, and therefore offset each other.
Forward foreign exchange transactions occur if both companies have a currency the otherneeds.
It prevents negative foreign exchange risk for either party.
Foreign exchange spottransactions are similar to forward foreign exchange transactions in terms of how theyare agreed upon; however, they are planned for a specific date in the very near future,usually within the same week.
It is also common to trade forward-forward,where both transactions are for forward dates.
UsesThe most common use of foreign exchange swaps is for institutions to fund their foreignexchange balances.
Once a foreign exchange transaction settles,the holder is left with a positive position in one currency, and a negative position inanother.
In order to collect or pay any overnight interest due on these foreign balances, atthe end of every day institutions will close out any foreign balances and re-institutethem for the following day.
To do this they typically use tom-next swaps, buying a foreignamount settling tomorrow, and then doing the opposite, selling it back settling the dayafter.
The interest collected or paid every nightis referred to as the cost of carry.
As currency traders know roughly how much holding a currencyposition will make or cost on a daily basis, specific trades are put on based on this;these are referred to as carry trades.
Companies may also use them to avoid foreignexchange risk.
Example:A British Company may be long EUR from sales in Europe but operate primarily in Britainusing GBP.
However, they know that they need to pay their manufacturers in Europe in 1months time.
They could of course SPOT Sell their EUR andbuy GBP to cover their expenses in Britain, and then in one month SPOT Buy EUR and sellGBP to pay their business partners in Europe.
However, this exposes them to FX risk.
IfBritain has financial trouble and the EURGBP exchange rate goes against them, they mayhave to spend a lot more GBP to get the same amount of EUR.
Therefore they create a 1M Swap, where they Sell EUR and Buy GBP on SPOT and simultaneouslyBuy EUR and Sell GBP on a 1 Month forward.
This significantly reduces their risk as theyknow that they will be able to purchase EUR reliably, while still being able to use themoney for their domestic transactions in the meantime.
Pricing The relationship between spot and forwardis known as the interest rate parity, which states that whereF = forward rate S = spot raterd = simple interest rate of the term currency rf = simple interest rate of the base currencyT = tenor The forward points or swap points are quotedas the difference between forward and spot, F – S, and is expressed as the following: if is small.
Thus, the value of the swap pointsis roughly proportional to the interest rate differential.
Related instruments A foreign exchange swap should not be confusedwith a currency swap, which is a much rarer, long term transaction, governed by a slightlydifferent set of rules.
See alsoOvernight indexed swap Foreign exchange marketInterest rate parity Forward exchange rateCross currency swap References.
South Korea's foreign exchange reserves havedipped for the first time in seven months.
The country had enjoyed a steady rise in reservesfrom February to August, but the slight drop in September, combined with the central bank'sfailure to renew a currency swap deal with China, is worrying experts.
Lee Unshin reports.
According to the Bank of Korea, as of September,the nation's foreign exchange reserves stood at 384.
67 billion U.
down 170million from the previous month.
It is the first dip in Korea's foreign exchangereserves in seven months.
As of the end of August, the country was theworld's ninth largest foreign exchange holder.
Central bank data shows that the greenbackstrengthening in the global market lowered the value of non-dollar currencies, includingthe Korean Won, Euro and Japanese Yen.
Meanwhile China's reserves remained the highestin the world, rising for the 8th month straight to over 3.
1 trillion dollars last month.
Seoul and Beijing's 56 billion dollar currencyswap deal came to an end earlier this week.
as the two nations failed to reach an agreementon terms to extend the deal.
The agreement had accounted for some 46-percentof the total value of Korea's foreign currency swap deals.
While BOK officials added that negotiationsto renew the deal are still underway,.
market analysts in Korea voice concerns that if thedeal is over for good, it could result in financial damage for both sides in the longrun.
They also stressed the need to keep Korea'sforeign exchange reserves high in case a new deal isn't agreed.
Lee Unshin Arirang News.
– Hey everybody, welcome.
We're adding a little lessonin between other lessons.
We're recording this later on so maybe I was wearing a tie and the last lesson and maybe I'm gonna be wearing a tie in the next lesson but I,I remember that I forgot to tell you about swapinterest or rollover.
These terms or synonymous with one another and they are usedinterchangeably in the world of currency trading or FX trading.
Swap is the interest paidat the time of rollover.
Everyday the currencymarket sort of rolls over.
At about 5:00 p.
, Iwas being really careful this time Nate to draw slowly.
– [Nate] Maybe it's'cause you're zoomed in.
– Yeah, maybe it was because I zoomed in.
I gotta wait til that thing disappears.
At about 5:00 p.
time your FX dealer will roll your trades over.
You will not probablysee anything different about them but you've carried a trade from one day into the next.
Sometimes this is alsoreferred to as carry as in the carry trade oryou've carried a trade from one day into the next.
Alright, so what is this? Inside of your platformwhen you take a trade, and we'll view the terminal window inside of Meta trader here, one ofthe items that you're going to see in your terminalwindow on the right side inside the terminal window, part of your open trade is swap.
Swap is the interest that you either earn or the interest that you pay for holding on to a trade overnight.
Generally you will notearn or pay anything if you do not hold thattrade through 5:00 p.
time or whatevertime your broker uses.
But some dealers willcharge or pay interest on a minute by minute basis.
Check with your ForX dealer to find more information about that.
Why do they do that? Well, in the big world of trading every central bank around the world has an interest rateand you could see this on the nightly news,especially the business news.
Central banks set base interest rates.
So a central bank in Australia might have a 6% interest rate.
A central bank in Japan, the Bank of Japan might have a 0.
25 interest rate.
Nate, I know this is obvious,but which number is higher? – [Nate] Six.
(giggling) – The six is higher so this is Australia.
This is Japan.
So if you're playing along at home, let me ask a question.
I'll ask it to Nate and youcan take a moment to answer.
If you buy the Australiandollar/Japanese yen and you hold it overnight, will you earn interest or pay it? – [Nate] You're gonna earn it.
– You're gonna earn itbecause the Australian interest rate is higher.
Now the reason this is, this exists is a mystery to almost everyoneand it's been forgotten.
But in the old days, youwere holding on to something overnight in your bankaccount and you'd get paid interest on your holdingsjust like you would and on an annualized basis.
You'd get paid a little bit of interest to holding on to a high interest pair against a low interest pair.
If you're holding a high interest pair against a high interestpair, you might even get charged a little bit of interest.
If you sell the Australiandollar/Japanese yen you're short the Australiandollar and you're buying Japanese yen.
In that case, you're going to pay interest if you hold that trade overnight.
For simple calculations on swaps, you can go to Fxswap.
Oh, it's not doing anything,you can type into Google.
I'll just write it down here for you.
You can type in fxswap and, I have to write slowly so it doesn't move the monitor.
FX Swap calculator anda series of websites will come up and youcan say, oh I'm buying the U.
dollar/Japaneseyen or I'm selling the British pound/U.
dollar and you can type in your trade size.
– [Siri] Okay, I found this on the web.
– Siri thought I was talking to– – [Siri] Buying the U.
– Do you hear this?(chuckling) Siri was just answeringnothing that I asked her.
Oh, that's pretty funny.
If you Google that, youcan find calculators that will show you the overnight rate that you get paid or charged.
Generally, this is a small amount of money and it does not mean alot or factor in to your trading unless you'reholding onto something for a very, very long time.
Wanna thank Forest Park FX our sponsor.
If you're interested in FX trading, contact Forest Park FX to open an account and get paid cash back rebates on every trade you place.
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Terms and conditions will apply.
We'll see you in the next one.