Swap Definition

The definition of Swap can vary according to the context, which can make understanding it a bit complicated. When the term is used in the institutional or business setting it quite simply means one party swapping currency with another at rates which are agreed in advance. This Swap is usually done to benefit both parties involved in the Swap. In this case, Swap literally means swap, because the parties will swap back. This may seem strange, but let’s say a company in the United Kingdom (whose assets are in GBP) wants to procure goods in Turkey. And suppose there is a company in Turkey (whose assets are in Lira) wants to procure services in the UK. Instead of these two companies physically exchanging their assets into the currencies they need for the foreign market and exposing themselves to the risk of loss from price fluctuations especially in volatile markets, they can agree to swap and swap back at specific rates. This agreement is mutually beneficial for both parties.

This definition doesn’t mean a whole lot for Forex and CFD traders. When you are trading on cTrader with a retail broker (like the ones listed on our site) you are exchanging foreign currencies which you don’t own. For example, if your trading account balance is in EUR, but you have a long position in USD/JPY, you are borrowing a USD (because of leverage) to buy Japanese Yen. Both are currencies which you do not own. Swaps are charged by your broker for financing the position overnight.

In cTrader, you can find Swap Rates in the Symbol Information section of the Active Symbol Panel.

Comments are closed.