{"id":8052,"date":"2022-09-06T07:44:17","date_gmt":"2022-09-06T07:44:17","guid":{"rendered":"https:\/\/www.vtmarkets.com\/?p=8052"},"modified":"2022-09-06T07:44:17","modified_gmt":"2022-09-06T07:44:17","slug":"fx-swaps","status":"publish","type":"post","link":"https:\/\/www.vtmarkets.net\/pt\/learn-forex\/fx-swaps\/","title":{"rendered":"FX swaps"},"content":{"rendered":"\n
Understanding forex swaps<\/strong><\/h5>\n\n\n\n

What are swaps in forex? A swap in forex<\/a> trading occurs when two parties opt to loan one another an amount of a specific currency. Party A will loan a designated amount of one currency to Party B, and Party B will loan an equivalent amount of a different currency back to Party A. Both parties will pay interest on the amount of currency they have received.<\/p>\n\n\n\n

Each party will need to agree on an exchange rate. This is based on the current forex spot trading<\/a> rate \u2014 i.e., the exchange rate at the present moment \u2014 but the final agreed amount is likely to be above this value, factoring in predicted changes throughout the trade.<\/p>\n\n\n\n

The actual loan amount does not necessarily need to change hands during a forex swap. While an agreed principal amount will be used to derive the interest that needs to be paid on the loan, this principal amount may not need to be transferred between the two parties. <\/p>\n\n\n\n

Generally, if the principal is not transferred, the forex swap will be a ‘fixed for floating’ swap. This means the two parties will pay interest based on the currency’s actual interest rate. The interest rate can increase or decrease over time, affecting the amount the recipient of the currency needs to pay.<\/p>\n\n\n\n

In other cases, however, the full principal amount will be exchanged, and interest will be paid on top of this. At the end of the swap agreement, the exchange of the principal will be reversed, and each party will have their initial currency value returned to them.<\/p>\n\n\n\n

When the principal amount changes hands, this is usually executed as a ‘fixed rate’ swap. Interest rates are paid at the levels that apply at the beginning of the swap agreement. This rate does not change, and interest is paid at this consistent level for the entire exchange duration.<\/p>\n\n\n\n

Forex swaps and leverage<\/strong><\/h5>\n\n\n\n

Leverage in forex<\/a> is something that traders need to be aware of, as it is a significant part of the market process. This concept involves borrowing additional funds via a brokerage platform, which are then used to supplement the trader’s capital reserves. <\/p>\n\n\n\n

Trading leverage is represented as a ratio. A leverage ratio of 20:1 means that the trader is borrowing $20 for every $1 of their own capital they use to open the position. This allows traders to control a position 20x the value their own capital would otherwise allow \u2014 translating to 20x the profits if the trade is successful. Movements in currency prices are measured in pips. A pip in FX<\/a> is an incremental move at the fourth decimal place of the currency value or the second decimal place in the case of smaller denomination currencies such as the Japanese Yen. These single pip movements are minimal, so the trader does not stand to gain or lose much from each one \u2014 with leverage; however, these movements are magnified by the order of the leverage ratio.<\/p>\n\n\n\n

The loan amount will need to be paid back \u2014 plus interest \u2014 regardless of whether or not the transaction is successful. This is why traders need to be very careful with leverage, as their losses can be significant.<\/p>\n\n\n\n

Traders cannot use leverage when they carry out a forex swap. Leverage is used for other types of trading, usually when opening buying or selling positions on currency pairs in the hope of a profit. Instead, leverage relates to FX swaps in a different way. When traders use leverage, they expose themselves to the swap interest rate. This is because they are borrowing capital to supplement the trade, and this borrowed capital carries an interest rate, as mentioned above. Users pay interest on their leveraged trade in the same way swap traders pay interest on the capital they receive.<\/p>\n\n\n\n

Differences between forex swaps and other forex derivatives<\/strong><\/h6>\n\n\n\n

You can view an FX swap can as a forex derivative. This is because the value of the swap agreement is derived from underlying data taken from the foreign exchange market. There are several other types of derivatives that traders can choose from as they learn more about the forex market<\/a>, and swaps are different to these derivative types in many ways.<\/p>\n\n\n\n