Negative Rollover Swaps

Beginner Questions
1

Hi All,

Is anyone able to explain how Negative Rollover Swaps work?
I understand the currency a trader holds the time of rollover is the interest they would receive, where as the currency they have short is the currency they will be charged interest, whilst a trader will effectively receive/pay the value difference between the two.

My question is, why are some swap rates quoted as a negative (-) number, and is it possible to profit if both are quoted as negative rates? eg. Long Swap -4.13 and Short Swap -1

Cheers,
Lynchaldinho

2

So you have understand how it works:

  • If you are short AAA/BBB. You will be charged interest for borrowing AAA, and will receive interest for lending BBB.
  • If you are long AAA/BBB. You will be charged interest for borrowing BBB, and will receive interest for lending AAA.

If the difference between the interest charged and received is positive, you will receive the difference in your account. If however the difference between interest charged and received is negative, you will have the difference taken out of your account.
In an ideal world you should always have positive or 0 swap either for long or short when holding a specific pair. Obviously it is not like this for some pairs. This is probably not fair but it is the way the brokerage game is set up. Most liquidity providers use interbank overnight rates when calculating the swap rates and update them on a daily basis. It is also not uncommon brokerages to add an extra charge on top of these rates. That’s why some pairs have negative rates for both long and short. It is something you have to end up factoring as a cost of trading.
The formula for calculating the swap is (Nr. Of Lots *100000 * Nr. Of Days * Swap Rate) / 100000 (or 1000 for pairs with JPY). So the answer is NO: you cannot profit if both rates are negative.
Anyways you have the information in advance so you can calculate what would it cost you to carry trades overnight or simply avoid any swap costs trading intraday only (IMO you should not become intraday trader just because of the swaps).
Cheers :slight_smile:

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3

Hi eyedfondue,

Thank you for taking the time to reply. Greatly appreciated.

I do have a question in regards to the first section of your response whereby you indicate 'if you are long AAA/BBB, you will be ‘charged’ interest (AAA) and receive interest on what you’ve essentially sold (BBB). I was of the understanding if you are long, then this is the interest you would ‘receive’, not pay. The currency in the pair you have not bought ie. short (in this case, BBB as you have gone long thereby holding AAA) would be the interest you would be required to pay.
The difference between the two will determine whether your brokerage account is either credited or debited.

Thanks again.
Lynchaldinho

4

Hi Lynch and sorry for the late response.
Actually, you are right! It is the other way around, e.g. as your understandings is.
Basically, when you are trading a currency pair you are always buying and selling one of the currencies at the same time. So example: Buying EURUSD means you are buying EUR = receive interest and selling (borrowing) USD = pay interest, respectively selling EURUSD means you are selling EUR (borrowing) and buying USD. You receive interest for the currency you buy and pay such for the currency you sell. Thus, if the interest rate of the purchased currency is higher than the interest rate of the sold currency, you will earn from the swap in the ideal case. In case of the buying currency having a lower interest rate than the selling currency, you will be charged for swap.
Thanks for noticing that I edited it so it should be correct now.
Cheers :slight_smile:

5

Hi.
Have I gotten this right? :
In an ideal world, the swap charged overnight when in a long trade, would have been earned if short in same position with the SAME amount ? With other words, SAME swap amount (-) would be (+) if I hold the opposite trade?
Also, I looked at a couple swap calculators online. I tested USD/TRY because TRY had the highest interest rate of all tradable currencies with my broker. Now, the two calculators I tested (both seems to be on brokerage websites) showed (same lot size and base currency of course) approx -36 and -34 respectively for long and +9 and +10 respectively for short. Is it correct to assume that these two brokerages take quite a chunk of the swap? And that’s why same amount in short and long is not just switched with (-) instead of (+).
And lastly (given the assumntions above): Could this “chunk” taken differ significantly between brokerages? Could it be worth shopping around if this is part of your trading stradegy?

Thanks a lot,
Bostner

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