fxarun wrote:Hi Bob,
All the positions in the spot forex market have to be expired at 5pm EST everyday. The clearing house will roll over the open positions automatically at 5pm EST everyday. It means the open positions will be exchanged (swapped) for the new positions. Again, the new positions will expire the following settlement date at 5pm EST rollover. This process is also known as “tomorrow, next day” or simply “tom next”.
When you buy EURUSD, it means you pay USD to buy Euro. In fact, it is not you who pays USD and buys Euro. It is the liquidity provider (the bank) that does it for you and on behalf of you. They pay USD and receive Euro. When you hold your position overnight and the time reaches the roll over time which is 5pm EST, the liquidity provider has to do the rollover process and the two currencies that are exchanged during the rollover, are not generally valued at the same price. The difference in the value of the two currencies is based on the difference of the overnight bank interest rates between the two currencies.
When you buy Euro against USD while Euro has a higher overnight interest rate than USD, it means the bank gives a lower interest rate currency (USD) and holds the one that has a higher overnight interest rate (Euro). Therefore, they make some money through the higher interest rate of the currency they hold and that is why they pay you some small credit to your account at 5pm EST. Conversely, if they hold a currency that has a lower overnight interest rate and give the currency that has a higher overnight interest rate, they lose some money on the interest difference and therefore, you have to pay some small money as the swap. After the rollover at 5pm EST, you may also notice a small difference in the price of your original position and the new position assigned during the rollover.
Swap can change on a daily basis. Ultimately, with the real ECN/STP brokers , it is only the bank that calculates the swap, and the broker has no control on it.
Some banks follow the formula and some of them have their own formula and rules to calculate the swap.
Arun
That is a good explanation of swaps and a good lesson. However, it is not what I am talking about. If both of us belong to the same broker and both of us buy eur/usd at the same time and use the same lot size, the cost of that trade can differ between you and me based on our leverage. If i trade 10:1 on a 100,000 lot I pay interest on 90,000 because that is the money I borrowed to make that trade. If you have 100:1 leverage you are paying on 99,000 of borrowed money. Therefore you are paying more for that trade than I am even though they are the same size lot, same broker, and same swap rate. Your costs are higher than my costs are. People keep debating the how of swap, I am talking about the results to your account. |
but could be a bug.