Swap - what is it in simple words?

Trading on "Forex" provides knowledge of some terms. One of them is a "swap". What is it and what is it for, read on.


A swap is a transfer of open transactions through the night. It can be positive (charge commission) and negative (its write-off). Most often, this operation is resorted to at the conclusion of medium- and long-term transactions. During the day, no swaps are awarded.

How the swap is formed

Every weekday at 01:00 in Moscow, all open transactions are recalculated, that is, first closed, and then reopened. For each of them, a swap is calculated based on the current rate of the refinancing rate. The smallest percentage is provided for popular couples (dollar / euro, pound / euro, etc.). Refinancing rates are annual. But the interest rate swap is charged daily. At the weekend, "Forex" does not work. Therefore, from Wednesday to Thursday a triple rate is charged.

swap what it is

What is a "swap" in plain language?

To better understand the essence of the swap, you need to understandwith the mechanism of the trader. On the "Forex" are quotes (the ratio of prices) of currency pairs. When buying a pair of EUR / JPI, two transactions occur simultaneously: the euro is bought and the Japanese yen is sold.

But how can I acquire a currency that is not inHaving dollars or rubles in the account? The answer is simple - using a swap. What it is? Let's consider in more detail which operations are performed when the trader pushes the button "Open Order" in the terminal on the conditions of the previous example.

  1. The central bank of Japan issues a loan at the refinancing rate.
  2. The received currency is immediately exchanged for the euro. The amount does not go to the investor's hands. She stays in the bank. Interest is accrued on it.
  3. The loan is paid to the Bank of Japan at the expense of interest received from the European Bank. The difference between these rates is a credit swap.

Positive and negative swap

Suppose an investor has opened a long position ona pair of euro / yen. When the transaction is completed, the interest rate is first charged on the euro (0.5%), then the deduction of the yen rate (0.25%): 0.5% - 0.25% = 0.25% - there is a positive swap. If the yen rate is 1%, the swap will be negative. This is the main principle of work on Forex.

interest rate swap

This is important to know!

You can not earn or lose all the profits throughswap. What it is? The large leverage that brokers offer, and significant fluctuations in rates, will block the effect of a small interest rate on a swap, even if it is negative. But to prolong its position only because of the positive difference in the rates of refinancing is not worth it. For violation of the "intraday" trade rules, you will have to pay with your deposit.


In addition to the currency swap considered, there isalso a credit default swap (CDS). From the title it is clear that this operation is related to the provision of a loan on exchange transactions in the conditions of default.

credit swap

In simple words, the default swap- this is an analogue of insurance for the lender. When a bank with a small amount of capital plans to issue a large loan amount to a reliable client, it must protect itself in the event of a non-return of funds. Therefore, in addition to credit, he enters into a risk protection agreement with a larger financial institution at a certain percentage. If the borrower does not return the funds, the lender will receive compensation from another institution.

By the same principle, operations are carried outswap. The buyer is at risk of non-return of funds, and the seller is ready to compensate for it for a fee. The first party issues the second all debt securities and receives funds in the account of the loan. Payment can be one-time or divided into several parts. In one case, the seller repays the difference between the current and nominal value of obligations, in the second - buys the asset from the buyer.

Advantages of CDS

The main advantage of this operation is absenceneed to create a reserve. In the example considered above, the bank should create a reserve in case of default of the borrower, which will severely restrict the conduct of other transactions. Insuring its risks, the buyer is freed from the need to divert funds from the turnover.

CDS allows you to separate credit risks from others and better manage them.

default swap

CDS VS: Insurance

The subject of a CDS transaction can be any obligation. For example, you can insure the risk of non-fulfillment of delivery conditions. Let's consider an example.

The buyer listed the equipment supplier inanother country an advance of 80%. Delivery must be made within two months. The term is long, and therefore there is a risk of occurrence of unpredictable situations, loss of funds. In this situation, the buyer can insure his risks with the help of CDS.

The law does not provide for the formation of reserves incases of providing protection through a swap. Therefore, it is cheaper than insurance. Reliability of the seller is assessed only by the buyer of the swap. What it is? Licenses for the activity are not required. CDS does not control the regulator, the stock exchange, so its clearance is associated with fewer formalities. Any organization or individual with the appropriate capabilities - a company, a bank, a pension fund, etc., can become a seller of protection.

credit default swap

CDS can be used even when the buyer does nothas direct arrangements with the borrower. For example, if a company buys bonds in the secondary market. Impact on the borrower is missing, and the assessment of the probability of its default is difficult.

Swap in the international market can be used,even when there is no real credit risk. In this case, it is a question of non-fulfillment of obligations by states (sovereign risk). Theoretically, you can also get protection from non-payment of a mortgage, the contract for which has not yet been concluded, and it is not known whether it will be concluded. But there is practically no sense in such insurance.

CDS in the financial crisis

The new tool immediately attracted attentionspeculators. The market was on the rise, default was not foreseen. Why not use "free" money? The situation changed in 2008. The banks could not service the debts they incurred and went bankrupt one by one. The fifth-largest in the US Bear Stearns Bank in 2008 sold for a symbolic amount, and the collapse of Lehman Brothers consider the beginning of the active phase of the financial crisis.

The insurance company AIG was saved at the expense ofthe US government. Of all the outstanding swaps ($ 400 billion), only banks needed to transfer $ 22.4 billion. Each financial institution on Wall Street had simultaneously great requirements and obligations under the CDS. The state first of all rushed to save the largest institution - bank JP Morgan, but not directly, but through corporations that bought up financial toys.

swap a simple

To ensure that all CDS buyers receive satisfaction,would have to declare the total default of the largest banks in the US and Europe. Wall Street, the City of London would simply cease to exist. Even before the crisis, Warren Buffett called all derivatives "weapons of mass destruction." The collapse of the financial system was avoided only by the infusion of public funds. Despite all the consequences of the crisis, the CDS "bomb" did not explode, but only made itself felt.

Disadvantages of CDS

All described advantages with market regulationpractically unrelated. Given the trend to tighten control over financial institutions, eventually they will all be lost. The crisis of 2009 prompted state authorities to review the norms in the sphere of financial regulation. It is likely that the central banks will introduce mandatory redundancy to protect sellers.

The default swap does not help solve the problemnon-fulfillment of financial obligations. In the crisis period, the number of defaults increases. The risk of bankruptcy not only of companies, but also of the state increases. In such periods, swap buyers try to get payments from sellers. The latter are forced to sell off their assets. This vicious circle only aggravates the crisis.

 swap operations

Impossible bills

The importance of refinancing rates is important to considerwhen opening a position for a long period (2-3 weeks). In such cases it is better to use unimpeded accounts. They are in demand with every broker. However, the lack of credit rates brokers compensate for additional commissions.


Briefly summarize all of the above about the swap. What it is? A swap is a difference in the interest rates of the Central Bank, which is credited daily to all open positions. In popular world currencies, this influence is almost imperceptible. But when opening a long position on the "exotic" currencies of the third world, it is better to immediately transfer funds to unimpeded accounts.

Related news

Swap - what is it in simple words Swap - what is it in simple words Swap - what is it in simple words Swap - what is it in simple words Swap - what is it in simple words