The term forex swap often leaves traders and investors baffled. Due to incomplete knowledge and improper application, traders often face the wrath of unprecedented loss. So, while forex rollover swap is an easy concept, a thorough and detailed understanding is required to reap some handsome profits.
What is a forex swap?
The forex market or foreign exchange identifies swap as a double legged process. Its main purpose or use is to exchange the date value of a currency pair to a different date, which is often some date in the near future. Forex rollover swaps also find use in figuring out a number of swap points calculated in terms of the initial trades exchange value. It is represented in the form of pips.
How does it work?
A forex swap takes places via two legs. In the first leg, a trader goes long or short on a specific currency against another currency. The rate application of the transaction takes place on a future date. Veterans refer to this as the near date of a forex rollover swap.
The second leg sees this particular currency going short to close the position. The whole transaction once again takes place on a rate; both sides agree upon this rate depending on a future or far date. The whole process remains independent of any spot market risk since any potential risk by the near date eliminates itself by its corresponding far date.
Carry Cost and forex points (swap)
The overall cost incurred when a trader lends one currency and buys the other is non-trivial to the calculation of forex swap points. The time period stretches from the spot or near date to the value or far date. In order to make it eligible for calculation with the spot rate, investors convert it into pips and are often termed as carry or cost of carry.
Traders calculate carry in case of forex rollover swaps by adding interbank deposit rates of the currencies with the total number of days between the spot and forward date. In most cases, a trader who sells at an interest rate incurs a positive carry while the other incurs a negative carry.
Why go for forex rollover swap?
When traders intend to delay delivery pertaining to a certain contract, they opt for forex swap. It also finds use in fetching the delivery date closer. To be precise, forex rollover swaps help traders in the extension of value dates. Often brokers perform these rollovers on the behalf of their clients automatically after 5pm EST.
One can simply choose to hedge their existing forward contract by using these rollover swaps. This is done by closing a near date contract and opting for a new near date as a convenient method to hedge a position.
So, you can say that a forex rollover swap helps you to hedge your position; It aids in getting a substantial profit maintain all optimal conditions. Therefore, if you are interested in forex trading, get in touch with a reliable broker today.