What is a swap?
A price tag for the night you carry over.
The word “swap” is used both for large trades between banks and for an individual’s foreign exchange trades. At the root of both lies the gap between two currencies’ interest rates.
In 30 seconds
- An FX swap between banks exchanges two currencies now and exchanges them back on a later date. In April 2025 it averaged $4 trillion a day, the most traded foreign exchange instrument.
- The rate for exchanging back reflects the gap between the two currencies’ interest rates (interest rate parity).
- In an individual’s foreign exchange trading, the “swap” is what is paid or received when a position is rolled over to the next business day. Firms set it from the rate gap, and it can be received or paid.
One word, two faces.
Both trades between banks and trades by individuals include something called a “swap”.
Average daily turnover of FX swaps, April 2025
The most traded foreign exchange instrument (BIS).
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Exchange, then exchange back
An FX swap exchanges two currencies on one agreed date and exchanges the same two currencies back on a later agreed date. The second rate is usually different from the first.[1]
In the April 2025 survey, FX swaps averaged $4 trillion a day, the most of any foreign exchange instrument.[2]
The rate gap becomes a price.
The rate for exchanging back on a later date reflects the gap between the two currencies’ interest rates.
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Interest rate parity
A BIS paper describes “covered interest parity”: the gap between two currencies’ interest rates should equal the gap between the forward exchange rate and today’s rate.[3]
In other words, a promise to receive the higher-yielding currency on a later date has that gap built into its price.
Cross the night, and a price tag appears.
In an individual’s foreign exchange trading, the swap is what is paid or received when a position is carried over to the next business day.
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How rolling over works
Retail foreign exchange trades are often kept open by pushing settlement forward. Each rollover creates a payment or receipt based on the gap between the two currencies’ interest rates.
How firms set it
The US self-regulatory body NFA requires firms to set out in a written policy how rollover charges and credits are calculated, to record the components and their sources, and to show rollovers on the daily confirmation.[4] The method of calculation differs from firm to firm.
The tag can be received — or paid.
Its direction depends on whether you hold the higher-rate currency or the lower-rate one.
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When rates move, the tag moves
The rollover payment is set by the gap between the two currencies’ interest rates. When central banks move policy rates, the gap changes too.[5]
The tag alone does not decide
Even on the receiving side, if the exchange rate moves by more, the trade as a whole can still lose. This edition does not recommend which side to take.
A scale for reading what comes next.
A scale for reading the swap’s price tag.
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Two interest rates
The two currencies’ policy rates, and how the gap between them is moving.[5]
The firm’s policy
Where and how the method for calculating rollover charges is written down.[4]
The forward rate
The gap between the forward rate and today’s rate, and whether it reflects the rate gap.[3]
This is not investment advice
This edition explains how swaps work. It does not recommend any currency or trade.
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NEXT QUESTIONThe deepest tap in money.NEXT QUESTIONThe largest market in the world has no building.See the Field Notes shelf →What this edition cannot tell you
- Actual swap values at individual firms. They change by firm and over time, so this edition does not cover them.
- Detailed national rules for retail trading, in Japan or elsewhere. This edition checked the US example only.