Currency swap - settlement of obligations of the parties to the transaction
Two currencies are involved in transactions in the market. The currency, which is bought, is deposited to the trader's account, and the currency, which is sold, is taken on credit. Due to the fact that the term of a transaction is unknown in advance (while the transaction is open), the currency credit and deposit are accrued when the position is carried over to the next day. Such transfer of a position for the next day is called currency swap.
What is a swap deal?
Let's take a closer look at what a swap deal is? In normal mode, transactions in the market are made on spot terms, i.e., all amounts that have been delivered on the current business day, must be delivered in the full amount on the next business day as well. To prevent this from happening, it is necessary to make a swap deal on . A transaction of this type will allow you to make closing and opening a position at the current exchange rate. A currency swap in the market will settle the obligations of each party to the transaction.
The central bank sets the discount rate for each country's currency. The rate may be different for each individual country. The difference can be so significant that Many traders manage to earn decent moneyby buying and selling currencies of different countries.
For example, in the United States the discount rate is 5% and in Great Britain it is 6 %.
On the currency pair GBP / USD we buy 1 standard lot (100000 units of the base currency, in our case GBP) at a rate = 1.99.
The payment for the swap transaction will be: (100,000x1.99/100) x (6%-5%) = 1990 $ per year.
In one day the transaction to pay for the currency swap will be equal to: 1990$ / 365 = 5.45$ per day.
When opening long position on , purchases on the currency pair GBP / USD are borrowed USD at 5% p.a. and opened a GBP deposit at 6% p.a. Since the deposit interest exceeds the credit interest, the trader's currency account will be currency swap crediting at an amount of 5,45$ per day.
If it opens short position on selling GBP/USD currency instrument, the situation will be quite different: borrowing GBP currency at 6% p.a. and opening a deposit at 5% p.a. for USD. In this case, the credit rate exceeds the deposit rate and the trader's account will be charged on a daily basis swap deal in the same size - 5.45$.
In our example, the one percent rate for each individual currency was used to simplify understanding. In practice, the discount rates for credit and deposit for each individual currency are almost never the same.
Types of currency swap
So, on the market we can distinguish three main types of currency swap:
One-day (short) currency swap on (before spot). In this variant the two transaction dates that are part of the swap and go all the way to the spot. This means that one transaction takes place on the basis of the spot-tomarket mechanism, and the second transaction takes place on the day after that swap transaction takes place.
Standard (classic) currency swap (from spot). Here the near value date will be spot, and the far date will occur as a forward.
Forward foreign exchange swap (after spot). These transactions can be characterized as a combination of 2 outright transactions, i.e., the transaction closest in time occurs on forward terms, and the transaction opposite to it is made on the basis of the late forward mechanism.
If the closest position in time (conversion) is a purchase of currency (the main), and the deleted is a sale of currency, then the swap transaction is called that: "bought-sold.". If the sale of currency is made earlier than the position that is reversed to it, then the currency swap will be called: "sold-bought.".
Basically, a currency swap is performed by the same person and therefore both currency transactions are performed by the same bank. A swap of this type is called "clean". If two banks make a swap transaction, then it is called "engineered swap".
Finally, I would like to add that in the trading terminal MetaTrader 4 on the market, the currency swap is calculated automatically.