Swap

The rolling over day by day should be proceeded using swap, which is the combination of buying contract and selling at the same time on the different value dates. The swap is essentially traded for the foreign currency funding. Let us assunme 1 million US dollar versus Japanese Yen which to be bought and sold.

(1) Buying USD and selling JPY on the spot date, which is two business days succeeding to the trade date.

(2) Selling USD and buying JPY on one month correspondent to the spot date

You have to pay JPY and receive USD at the spot date that is two business days after the trade date. Thus, first, your aim to raise fund in USD results in achievement. After one month passes, the value date of (2) comes, you would have to pay the relevant USD and receive JPY. In this way, it follows that you should raise the fund in USD using the collateral in JPY during that period. Stop here a bit. In case that the interest rate of JPY is assumed to be 1% and that of USD to be 6%, it should be a bad trade for the USD lender for that one month, isn't it? Therefore, the swap trade has the market convention that the trading price should be adjusted in advance not to be disadvantage for the side who is placing higher yield foreign currency. This price gap is just called as the swap point arising from the differential of interest rates yielding between two currencies. In case that the commodity currency yields higher interest than the base currency, it follows to be called as discount system. One the other hand, in case that the commodity yields lower, it should be as premium system. It is needless to say that there does not exist any exchange risk because the trade of buying and selling would be made at the same time.

It does not make sense that the swap is traded itself. The banks use the swap trade for covering the foreign currency deficit during the necessary period. In the forex margin trading, the swap trade is made use of for the position rolling over day by day. If you buy US dollar in the forex market, you would need to pay JPY two business day succeeding to the trade date, but you can postpone the payment schedule using the swap trade. When your position becomes sure to leave open at the end of the day, you have to take action to avoid JPY payment on the following day. You have to make a swap trade that forces you buying JPY and selling USD on the original payment date and selling JPY and buying USD freshly with some swap points on the following day of the original payment date. Most forex brokers usually make this swap trade automatically without customers' permission. In addition, this swap trade cost no commission fee. In this way, individual investors can carry their position for ever. As the swap trade is defined as a purchasing agreement and not a loan agreement, the forex margin trading allows investors to raise fund at on-balance without any loan agreement.