A swap is a secondary contract that two parties trade financial instruments through. These instruments actually can be almost anything, but most of the popular swaps are cash flows based on a notional principal amount that both parties agree to. Usually, the principal does not change hands. Each cash flow comprises of one leg of the swap. One cash flow is generally fixed, while the other is variable, which is based on a benchmark interest rate, floating currency exchange rate, or index price. So when you consider a broker, such as Exness, you should pay attention to their swap to see if it suits your trading tactics.
The most common kind of swap is an interest rate swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter contracts between businesses or financial institutions.
In an interest rate swap, the parties exchange cash flows based on a notional principal amount (this amount is not actually exchanged) in order to hedge against interest rate risk or to speculate. The instruments exchanged in a swap do not have to be interest payments. Countless varieties of exotic swap agreements exist, but relatively common arrangements include commodity swaps, currency swaps, debt swaps, and total return swaps.
Commodity swaps involve the exchange of a floating commodity price, such as the Brent Crude oil spot price, for a set price over an agreed-upon period. As this example suggests, commodity swaps most commonly involve crude oil.
In a currency swap, the parties exchange interest and principal payments on debt denominated in different currencies. Unlike an interest rate swap, the principal is not a notional amount, but is exchanged along with interest obligations. Currency swaps can take place between countries, for example, China has entered into a swap with Argentina, helping the latter stabilize its foreign reserves.
A debt-equity swap involves the exchange of debt for equity; in the case of a publicly traded company, this would mean bonds for stocks. It is a way for companies to refinance their debt or re-allocate their capital structure.
In a total return swap, the total return from an asset is exchanged for a fixed interest rate. This gives the party paying the fixed rate exposure to the underlying asset—a stock or an index for example—without having to expend the capital to hold it.
Swap is applied for various tools, in accordance with the Contract specifications. To calculate the amount of swap that applies to the particular parameters of a transaction, you can use the Trader's calculator. The following table sets out full details as to how swap is applied to accounts at Exness.
Exness has created special swap-free accounts for residents of Islamic countries. On swap-free accounts there is no daily crediting, withdrawal of funds, or losses related to swap-operations. Therefore, the client does not receive any extra income and does not suffer any extra losses.
These accounts are opened automatically: the system identifies which clients are residents of Islamic countries, based on the passport data and telephone number stated in the client's personal data, and attributes to this account the status "swap-free".
However, keep this in mind: Clients are found to have abused the "swap-free" status attributed to their accounts, Exness do retain the right to cancel this status on all of the client's trading accounts and apply swap to the account, covering the entire period during which the client has used the "swap-free" status. Improper use in this case is, including but not limited to, a situation where a large portion of the transactions on the client's trading account has a negative swap, which is not levied by Exness, likewise the "swap-free" status.