Swap-free accounts are offered to those who cannot earn or pay interest for religious reasons. In compliance with these religious restrictions, these swap-free Forex accounts will not be charged, nor will they earn the interest that comes with supporting Forex trading.
Please note that CIBfx allows swap-free accounts for religious reasons only.
In the world of finance, a swap is a derivative whereby two parties in identical amounts exchange (or swap) one currency for another with two different value dates. The level of swap rates can vary in size and change according to the level of interest rates.
Simply put, the swap is the difference between the overnight interest rate between two currencies.
Swaps can also be used to protect against certain risks such as fluctuations in interest rates, as well as to speculate on changes in the prices of the underlying financial instruments. For example, using swaps allows companies to reduce their exposure to interest rate fluctuations and limit cash flow fluctuations.
There are five general types of swaps: interest rate swaps, currency swaps, credit default swaps, commodity swaps and equity swaps.
In the world of the international foreign exchange market, currency swaps are used to roll over open positions from one day to the next. Holding an open overnight currency position involves receiving interest in one currency and paying interest in another.
A quick example below shows the calculations involved in currency swaps, assuming the selling position of a standard EURUSD lot. It involves the sale of 100,000 Euro and a simultaneous purchase of USD 100,000.
Assume that the interest rate on the Euro is at 2% and 1.5% per USD.
With an order to sell EURUSD we borrow Euro and deposit USD. The loan involves paying interest and the deposit involves earning interest.
Since the interest rate for the Euro is higher, we are essentially paying more to borrow the Euro than we are earning to deposit the USD.
The calculation of the swap may seem complicated but in essence it is quite straightforward.
Swap = (contract value) x (interest rate difference) x (currency pair price / 365)
Assuming a EURUSD price of 1.29205, our swap in this case is calculated as:
Swap = (100,000) x (1.5% – 2%) x (1.29205/365) = 1.76993 USD.
In this case, holding the position open overnight would cost you approximately $1.77 on the transaction. There may also be a broker commission (which we have not taken into account here) which would be an additional cost, over and above the pure exchange cost.
To enable your account to be swap-free, you must contact our customer support department at email@example.com as soon as our office receives your request, receive swap-free trading status for your account and we will notify you by email accordingly. If a swap-free trade, for any currency pair, is held open for more than 10 (ten) days, swap rates may apply, unless this requirement is waived by CIB.
Please note that CIB reserves the right to revoke the swap-free status on any live trading account.