What are Forex Swap Rates?
Swaps are a procedure that is performed in order to avoid taking physical delivery of a currency. Most investors and speculators never intend to take physical delivery and are only looking to gain on the fluctuations in price. Because of this, there is a daily swap procedure also known as rollover.
How do Swap Rates work in Forex?
In the interbank market, positions are simultaneously closed and opened at slightly different rates to account for varying exchange rates between countries in which the currencies are being traded. In the retail Forex market, most brokers simply debit or credit the amount to avoid confusing a new position with the original position. This is the way most retail and institutional traders prefer the process to be handled.
Positive and Negative Swap Rates
Depending on what currency pair is being held, swaps can have a negative or positive effect on a trade. For example, if a trader is holding a long position on AUD/JPY, they would collect positive swaps since the interest rate in Australia is much higher than the interest rate in Japan. If a trader is short AUD/JPY, they would receive negative swaps on their position. Traders need to take this into account when developing their strategy.