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# Understanding Swap in Forex Trading

Often we hear the term swap or interest in forex trading business. But what does swap mean? This article will discuss simply the definition of Swap.

The calculation of interest is not independent of the interest rate of each country. We will be charged from the difference of the State interest rate in the pair. For example GBPUSD, then we will see the difference of interest rates UK and US interest rates. Next GBPJPY, then we will see the difference of interest rates UK and Japanese interest rates.

There are also traders or entrepreneurs who take advantage of positive interest rate differentials. But this is not a ‘toy’ of retail traders because it requires big funds to do Carry Trade. Borrowing funds from countries that have small interest rates, then stored in a country that has a large interest rate. Of course it must be calculated the costs arising from the action and also not always Carry Trade is a profit.

Let’s re-look at swaps that may appear when we are trading forex. Swap per day can be calculated by:

BUY pair A / B = ((State Interest Rate – State B Interest)% x Lot x Size of Contract) / 365

SELL pair A / B = ((State Interest Rate B – State Interest Rate A)% x Lot x Contract Size) / 365

If we do BUY 1 lot transaction in GBPUSD then we have to pay attention is UK interest rate (0,25%) and US interest rate (1%).

BUY pair GBPUSD = ((0.25-1)% x1x100.000) / 365 = \$ -2.05 per day.

This can be interpreted, we will be charged a swap fee of \$ 2.05 per day.

If we do SELL 1 lot transaction in GBPUSD then we have to pay attention is UK interest rate (0,25%) and US interest rate (1%).

SELL pair GBPUSD = ((1-0.25)% x1x100.000) / 365 = \$ 2.05 per day.

The above formula is a simple Swap calculation approach. The actualization, each broker has a different interest rate policy BUY and SELL. To see the swap rate BUY and SELL each pair, you can click on ‘Market Watch’ select pair GBPUSD then right click select ‘Specification’. Later will appear an image like this: