Forex Basics: What is Swap and Carry Trading?

For friends who like to do medium and long-term, you may find one thing, that is, there will be "overnight interest". The overnight interest not only has a negative value, but also a part of your own expenses, and also has a positive value, that is will give you a portion. So how did this overnight interest come about?

As we have said before, if you want to go long on a currency pair, such as long eurusd, then it is equivalent to exchanging U.S. dollars for the equivalent amount of euros. Suppose we want to buy 1 lot of eurusd now, then what we buy is euros and what we sell is dollars. The so-called buying euros is equivalent to depositing euros in the bank, and the bank should pay us interest. Sending out US dollars is equivalent to borrowing US dollars from the bank, and we should pay the bank interest. Then the interest rate difference between these two currency pairs is what we call overnight interest.

The interest rates of currencies of various countries are basically based on the inter-bank lending rate, and dealers generally provide this data on their websites and trading software. Therefore, when we hold a position overnight, if the interest rate of the currency we buy is higher than the interest rate of the currency we sell, then we will receive overnight interest. Conversely, if the interest rate of the currency we buy is lower than the interest rate of the currency we sell, We will pay overnight interest. It should be noted here that the overnight interest will be charged three times every Wednesday, because Saturdays and Sundays are not open, so the overnight interest on Saturdays and Sundays will be charged together every Wednesday. For small orders or short-term orders, the impact of overnight interest is not great, but for large orders or long-term orders, overnight interest is also a considerable expense or benefit. This also leads to what we are going to talk about next - arbitrage trading

In Japan, since the interest rate on bank deposits has always been very low, and even has a negative value, Japanese women who hold economic power often use arbitrage transactions to obtain more wealth. Let's give an example: Suppose the interest rate of the Japanese Yen is 0.5%, while the interest rate of the Australian Dollar is 4.5%. A Japanese woman goes to the bank to borrow a sum of money (Japanese yen), and the interest she needs to pay is 0.5%, and then converts the money into Australian dollars, and can charge 4.5% interest, so that after one year, there will be 4.5%- 0.5% = 4% interest income. Therefore, in the foreign exchange market at that time, those Japanese housewives would sell yen to exchange for high-yield interest rate products, such as New Zealand dollars, Australian dollars and so on. For example, buying audjpy, so that they can enjoy the profits of short positions brought about by the decline in yen interest rates (it should be noted here that buying audjpy is equivalent to buying Australian dollars and selling yen, so it is a short position in yen ), you can also enjoy the benefits of the interest rate difference between the Australian dollar and the Japanese yen, which really kills two birds with one stone.

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