FX Swap Calculation Example

Swap Rate Calculation

An example of Swap calculation for the currency pair AUDUSD with a transaction volume of 1 lot (100 000 AUD) and current exchange rate 0.9200.

• Currency Pair AUDUSD
• Transaction Volume of 1 lot (100 000 AUD)
• Current exchange rate 0.9200.

When opening a long/short position, a purchase/sale of the base currency and a reverse operation with the quoted currency take place. In case of rolling a position on the currency pair AUDUSD over to the next day, in IFC Markets Libor/Libid overnight rates on the US Dollar and Australian Dollar Overnight Deposit/Lending Rate for the Australian currency are used.

Libid vs Libor

Libor/Libid – average-weighted interest rates of interbank Lending/Deposit, daily fixed by the British Banking Association. From May 2013, the rates for different time periods are calculated on a daily basis for 5 major currencies, including CHF, EUR, GBP, JPY and USD.

Australian Dollar Overnight Lending/Deposit Rate – interest rates of interbank financing in Australia, tied to the target overnight call rate of the Reserve bank of Australia.

For the date 22 July, 2013 overnight interest rates are as follows:

• Australian Dollar lending: 2.70%
• Australian Dollar deposit: 2.50%
• US Dollar lending: 0.12%
• US Dollar deposit: 0.00%

Long Swap

Rolling a long position over to the next day, the client receives 2.50% annual interest from purchasing 100 000 Australian Dollars, which is 2500 AUD per year or 6.94 AUD (6.38 USD) per day. At the same time, borrowing US Dollars (at the current exchange rate 100 000 AUD is equivalent to 92 000 USD) implies an obligation for the client to pay 0.12% annual interest, which is equal to 110.4 USD per year or 0.31 USD per day.

Netting of mutual liabilities leads to a positive gain for the client of 6.1 USD, or if recalculated to Swap-points equals to 0.61 (point – the fourth decimal place).

Short Swap

When opening a short position and rolling it over, the client has to pay 2.70% annual interest for borrowing 100 000 Australian dollars, which equals to 2700 AUD per year or 7.5 AUD (6.9 USD) per day. At the same time, purchasing US Dollars (at the current exchange rate 100 000 AUD is equivalent to 92 000 USD), the client does not get a reward, as the current USD Libid rate is very close to zero.

Netting of mutual liabilities leads to a negative loss for the client of 6.9 USD, or if recalculated to Swap-points, equals to -0.69 (point – fourth decimal place).

In practice many companies, even if using (most favorable to the client) interbank overnight interest rates, often move away from their original values adding their own interest, which may sometimes even exceed interbank rates.

As a result, Swap conditions become much worse for the client, distorting the real parity of the money market. There is no difficulty to find companies, offering much less favorable rollover costs for all groups of trading instruments, compared to the conditions offered by IFC Markets.

Returning to the currency pair AUDUSD, one of these companies on the same trading day has set Swaps at 0.34 points for long positions and -1.5 points for short positions. Comparing to the example above, it is evident that the conditions for the client become twice worse.

If the position remains open for a considerable period of time, the difference between Swap conditions becomes extremely evident. Imagine that the position is rolled over 30 times during a month.

- In this case the client of IFC Markets would receive a total gain of 183 USD for a long position (100 000 AUD) and a total deduction of 207 USD for a short position (subject to interest rates and exchange rate unchanged).

- If the same position is rolled over 30 times under the above mentioned "less favorable" conditions, the total amount of gain from a long position would be only 102 USD, while the total deduction from a short position would equal to 450 USD (subject to interest rates and exchange rate unchanged).