What is Swap(Overnight Financing)? Its Mechanism, Calculation and Conditions explained!

October 27, 2017

The Complete guide for traders! Know the Swap/Overnight Financing today!

What is Swap(Overnight Financing)? Its Mechanism, Calculation and Conditions explained!

This article is originally referred from iForex Official Website

When trading leveraged Forex CFDs with iFOREX, your open deals are subject to Overnight Financing at the end of each trading day.

This Overnight Financing may be subject to credit or debit, calculated on the basis of the relevant interest rates for the currencies in which the underlying instrument is traded, plus a mark-up.

The mark-up for currency pairs is 0.75%.

*Cryptocurrencies are subject to a separate mark-up (see below under Index, Commodity and Crypto CFDs).

Can be credited and debited

If the calculated Overnight Financing Percentage is positive, it means that an applicable amount will be added (credited) to your account balance.

A negative Overnight Financing Percentage means that an applicable amount will be subtracted (debited) from your account balance.

You can find the relevant Overnight Financing percentage, amounts and their related running times on both the Deal and Limit forms, under Tools, within the ‘Market Info’ tab.

To calculate the Overnight Financing, which your account will be debited or credited with, simply multiply the Overnight Financing percentage with the size of your deal.

Note that Overnight Financing on a Friday is 3 times more than usual as it covers the entire weekend period (Friday to Sunday). The Overnight Financing amount is either debited or credited in the other currency of your CFD. If the CFD’s quoted currency differs from the account’s currency, it will be converted to the account’s currency.

Formula

Calculation of Overnight Financing Percentage when you Buy (Long Positions):

Overnight Financing Percentage = -(3M interest rate of the other currency – 3M interest rate of the base currency + Markup / 360)

Calculation of Overnight Financing Percentage when you Sell (Short Positions):

Overnight Financing Percentage = -(3M interest rate of the other currency – 3M interest rate of the base currency – Markup / 360)

To calculate the Overnight Financing Amount, simply multiply the percentage by the deal amount:

Overnight Financing Amount = Deal Amount × Overnight Financing Percentage

Examples of Calculation

Example I

This example involves a situation whereby the Interbank Rate difference is HIGHER than the markup. In such cases, your account will be debited when you go Long and credited when you go Short:

  • Instrument = EUR/USD (Euro vs. US Dollar)
  • EUR (base currency) 3M interest rate (annualized) = -0.37% = -0.0037
  • USD (other currency) 3M interest rate (annualized) = 1.08% = 0.0108
  • Interbank Rates difference = 1.45% = 0.0145
  • Markup = 0.75% = 0.0075
  • Deal Amount value expressed in the other currency = 106,550 USD (100,000 EUR at Current Closing Rate of 1.0655)

Overnight Financing Percentage when you Buy (Long Positions):

Overnight Financing Percentage = – (0.0108 – (-0.0037) + 0.0075 / 360) = -0.0000611 = -0.00611%

Overnight Financing Amount = 106,550 × (-0.0000611) = -6.51 USD, meaning 6.51 USD charge per day

Overnight Financing Percentage when you Sell (Short Positions):

Overnight Financing Percentage = (0.0108 – (-0.0037) + 0.0075 / 360) = 0.00001944 = 0.001944%

Overnight Financing Amount = 106,550 × 0.00001944 = 2.07 USD credit per day

Example II

This example involves a situation whereby the Interbank Rate difference is LOWER than the markup. In such cases, your account will be debited each night regardless of your position’s direction:

  • Instrument = GBP/JPY (British Pound vs. Japanese Yen)
  • GBP (base currency) 3M interest rate (annualized) = 0.39% = 0.0039
  • JPY (other currency) 3M interest rate (annualized) = -0.09% = -0.0009
  • Interbank Rates difference = 0.48% = 0.0048
  • Markup = 0.75% = 0.0075
  • Deal Amount value expressed in the other currency = 13,620,000 JPY (100,000 GBP at Current Closing Rate of 136.20)

Overnight Financing Percentage when you Buy (Long Positions):

Overnight Financing Percentage = – ( (-0.0009) – 0.0039 + 0.0075 / 360) = – 0.0000075 = – 0.00075%

Overnight Financing Amount = 13,620,000 × (-0.0000075) = -102.15 JPY, meaning 102.15 JPY charge per day (≅1 USD)

Overnight Financing Percentage when you Sell (Short Positions):

Overnight Financing Percentage = ( (-0.0009) – 0.0039 – 0.0075 / 360) = – 0.000034167 = – 0.0034167%

Overnight Financing Amount = 13,620,000 × (-0.000034167) = -465.35 JPY, meaning 465.35 JPY charge per day (≅4.5 USD)

Example III

This example involves a situation whereby the Interbank Rate difference is LOWER than the negative markup. In such cases, your account will be debited when you go Short and credited when you go Long:

  • Instrument = USD/JPY (US Dollar vs. Japanese Yen)
  • USD (base currency) 3M interest rate (annualized) = 0.39% = 0.0039
  • JPY (other currency) 3M interest rate (annualized) = -0.09% = -0.0009
  • Interbank Rates difference = -1.17% = -0.0117
  • Markup = 0.75% = 0.0075
  • Deal Amount value expressed in the other currency = 10,341,000 JPY (100,000 USD at Current Closing Rate of 103.41)

Overnight Financing Percentage when you Buy (Long Positions):

Overnight Financing Percentage = – ( (-0.0009) – 0.0108 + 0.0075 / 360) = 0.00001167 = 0.001167%

Overnight Financing Amount = 10,341,000 ×0.00001167=120.65 JPY credit per day (≅1.1 USD)

Overnight Financing Percentage when you Sell (Short Positions):

Overnight Financing Percentage = ( (-0.0009) – 0.0108 – 0.0075 / 360) = – 0.0000533 = – 0.00533%

Overnight Financing Amount = 10,341,000 ×(-0.0000533)=-551.52 JPY,meaning 551.52 JPY charge per day (≅5.3 USD)

Original Source: iForex Official Website

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