On the Forex market swap points settlement results from the difference between interest rates associated with the specific currencies in each pair

Contracts for Difference can be based on pairs of different underlying assets. In the case of currencies and other instruments based upon the spot market prices, for proper settlement of the transaction the interest rates level and cost of carry factors have to be taken into account.

If the trader has a long position in an asset that has a significantly higher interest rate than the other from the pair, it will be reflected on the account with positive swap points. Alternatively, long position in a low interest rate asset will result in negative swap points.

Let us assume that currently the EUR currency has a significantly higher interest rate than the USD dollar. It means that:

• if the trader has bought a EURUSD contract, he/she has a long position in the EUR (higher interest rates), and a short in the USD (US dollars)– in such a case swap points should be positive.
• if the trader has sold a EURUSD contract, he/she has a short position in the EUR, and long in the USD (lower interest rates) – swap points should be negative.

In the case of CFDs based on spot prices of commodities (metals mostly), swap points are based upon the difference between the interest rates of the US dollars and cost of carry of the given commodity.

Cost of carry basically covers the costs related with storage and insurance of commodities. In practice it means:

• If the trader has bought a contract for Gold (symbol F.GOLD) – he/she has a long position in gold and short in the US dollars. Swap points will be negative as a result of cost of carry, associated with a long position in gold.
• If the trader has sold a contract for gold – he/she has a short position in gold and long in US dollars. If the difference between interest rates for US dollars and the cost of carry for silver is significant, the swap points should be positive.

For Contracts for Difference based upon prices of futures instruments, the issue of swap points is much simpler. There are none.

How do the swap points work in practice?

An investor has a position in the GBPUSD market, 1 contract left overnight. Current swap points are given as (for example):

• GBPUSD - long position - 1,4 points.
• GBPUSD - short position – 2,2 points.

In order to calculate the value of swap points in CZK, the following formula can be used:

Long position = 1,4 points value =1,4 * point 0,0001 * nominal value 100 000 = 14 (USD)

Short position = -2,2 points value =-2,2 * point 0,0001 * nominal value 100 000 = -22 (USD)

Assuming the USDCZK price is 20,00:

1,4 points value in CZK = 14 USD * 20 USDCZK = 280 CZK

-2,2 points value in CZK = -22 USD * 20 USDCZK = -440 CZK

The details of the calculation of point (pips) value are covered in the dedicated section.

The open positions are adjusted by swap points at 00:00. On Friday night, the value is adjusted by the swap points for the whole weekend.

The swap points added or deducted for the open position will be displayed in the Swap column in the position data in the Toolbox window at the bottom of the MetaTrader workspace.