Carry interest, also known as the swap fee, is the cost or income earned when holding a forex position overnight. A swap calculator simplifies the process of determining this amount based on factors such as the interest rate differential between currencies, trade size, and the holding duration.

What Is Carry Interest?

Carry interest arises due to the difference in interest rates set by the central banks of the currencies in a forex pair:

• Positive Carry: You earn interest when you hold a currency with a higher interest rate while selling a currency with a lower interest rate.
• Negative Carry: You pay interest when you hold a currency with a lower interest rate while selling a currency with a higher interest rate.

For example:

• If the interest rate for AUD is 4% and for JPY is 0.5%, holding a long AUD/JPY position can result in positive carry interest.

How Does a Swap Calculator Work?

A swap calculator computes the overnight interest based on:

1. Currency Pair: Determines the applicable interest rate differential.
2. Position Type: Long or short.
3. Trade Size: The volume of the position (e.g., lots or units).
4. Broker’s Swap Rate: Some brokers add a markup or adjustment to the swap fee.
5. Duration: Number of nights the position is held.

Formula for Carry Interest

Swap Fee=Position Size×(Interest Rate Differential/365)×Exchange Rate\text{Swap Fee} = \text{Position Size} \times (\text{Interest Rate Differential} / 365) \times \text{Exchange Rate}

Where:

• Position Size: Number of units or lots traded.
• Interest Rate Differential: Difference between the interest rates of the two currencies.
• 365: Number of days in a year (or 360, depending on conventions).
• Exchange Rate: The current rate of the traded currency pair.

Steps to Calculate Carry Interest Using a Swap Calculator

1. Input the Currency Pair

Choose the pair you are trading, such as EUR/USD or AUD/JPY. The calculator will automatically pull the relevant interest rate differential.

2. Specify the Position Type

Indicate whether the position is:

• Long (Buy): Buying the base currency and selling the quote currency.
• Short (Sell): Selling the base currency and buying the quote currency.

3. Enter the Trade Size

Provide the size of the trade in lots. For example:

• 1 standard lot = 100,000 units
• 1 mini lot = 10,000 units
• 1 micro lot = 1,000 units

4. Select the Holding Period

Input the number of days or nights you plan to hold the position. Note that triple swaps are applied on Wednesdays to account for the weekend.

5. Calculate the Swap

Click the calculate button. The swap calculator will display the daily swap fee, total fee, or income for the holding duration.

Example Calculation

You hold a long position in AUD/JPY with the following details:

• Currency Pair: AUD/JPY
• Position Size: 1 standard lot (100,000 units)
• Interest Rate Differential: AUD (4%) – JPY (0.5%) = 3.5% (0.035 as a decimal)
• Exchange Rate: 85.00
• Holding Period: 3 nights

1. Calculate the daily interest: Daily Swap Fee=100,000×(0.035/365)×85.00\text{Daily Swap Fee} = 100,000 \times (0.035 / 365) \times 85.00 Daily Swap Fee=100,000×0.00009589×85.00=8.15 AUD\text{Daily Swap Fee} = 100,000 \times 0.00009589 \times 85.00 = 8.15 \, \text{AUD}
2. Multiply by the holding period: Total Swap Fee=8.15×3=24.45 AUD\text{Total Swap Fee} = 8.15 \times 3 = 24.45 \, \text{AUD}

You would earn 24.45 AUD in carry interest for holding the position for three nights.

Tips for Using a Swap Calculator Effectively

1. Account for Broker Adjustments: Check if your broker includes a markup or additional fees in their swap rates.
2. Consider Triple Swaps: Plan trades around Wednesday to account for triple swaps, especially in high-interest-differential pairs.
3. Monitor Position Size: Larger positions result in higher swap fees or income.
4. Combine with Fundamental Analysis: Use carry interest strategies in conjunction with economic data and central bank policies.

FAQs

What is a swap fee?
A swap fee is the interest earned or paid for holding a forex position overnight due to the interest rate differential between two currencies.

Does every trade incur a swap fee?
Yes, but the fee may be positive or negative depending on the interest rate differential and trade direction.

What is a triple swap?
Triple swaps are applied on Wednesday nights to account for the interest over the weekend.

Can swap fees be avoided?
Yes, by closing trades before the rollover period (typically at 5 PM New York time).

Are swap fees the same across brokers?
No, swap fees vary by broker due to different policies and adjustments.

Do swap fees impact long-term trading?
Yes, swap fees accumulate over time and can significantly affect the profitability of long-term trades.

Can I calculate swaps manually?
Yes, using the formula, but swap calculators simplify and automate the process.

Are swap fees charged in all markets?
Swap fees are common in forex but may also apply in CFDs, commodities, and other leveraged instruments.

What happens if the interest rate differential changes?
Swap fees will adjust accordingly, reflecting the new interest rate differential.

Can I use a swap calculator for exotic pairs?
Yes, swap calculators support all currency pairs, including exotic ones, as long as the interest rate data is available.

Conclusion

A swap calculator is an essential tool for forex traders to calculate carry interest and manage overnight trading costs. By understanding swap fees and using a calculator, traders can incorporate carry interest into their strategies, plan trades more effectively, and optimise long-term profitability.