The difference between the forward rate and the spot rate for a particular currency pair when expressed in pips is typically known as the swap points. These points are computed using an economic concept called Interest Rate Parity. This theory implies that the hedged returns received after investing funds in differing currencies should equate irrespective of what their interest rates are.

Using this theory, forward traders determine the forex swap points for any given delivery date mathematically by considering the net cost or benefit involved when lending a currency and borrowing another against it during the period of time encompassed by the spot value date and the forward delivery date. The fundamental equation used to compute forward rates when the U.

SWAP Rate Calculation | Swap Currency Example | Long Swap | Short Swap | IFC Markets

Using that as the basis for computing the swap points, one then gets:. Now consider a practical example to illustrate how the above swap points equation works in the case of computing the fair value for a rollover swap. To do this, you would first need to determine what the prevailing short term Interbank deposit rates are for each of the currencies involved in the pair you are trading.

You could then use the above equation to compute the swap points for a currency pair in which the U. Dollar was the base currency. Alternatively, you could also calculate the rollover by netting out the interest rates for each of the currencies involved.

The short term interest rate for the U. Dollar is only 0.

Computing Swap Points and Forward Prices

Furthermore, the short term interest rate for the Australian Dollar is 4. As a result, you will pay that interest rate on the currency.

This nets out to an annualized interest rate differential for the currency pair of 4. Read the basics about forex swaps. Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors.

The possibility exists that you could lose more than your initial deposit.

The high degree of leverage can work against you as well as for you. OptiLab Partners AB Fatburs Brunnsgata 31 28 Stockholm Sweden Email: You are using an outdated browser.

Foreign exchange swap - Wikipedia

Please upgrade your browser to improve your experience. World's best forex deals and strategy. Computing Forward Prices and Swap Points The fundamental equation used to compute forward rates when the U. Using that as the basis for computing the swap points, one then gets: See all Forex strategy articles. Sign Up Free Demo.