1. It Improves liquidity conditions- when the exchange is done between two nations, the problem of blocking dollars and then converting to destination currency is solved giving enough room for improving liquidity in the market.
2. It also stabilizes the balance of payments – It helps out in stabilizing the balance of payments of the nation.
3. Breather during tough times – Foreign exchange swaps are more stable, especially during recessionary market conditions.
4. Boost in forex reserves – As both nations exchange dollars so it helps in increasing the forex reserves for a nation.
Penalty on Swap
Theoretically, swaps are both positive and negative. If we put a buy position overnight, we get a swap and lose rate whereas if we put a sell position overnight, we will lose the swap. This decision is on the brokers and mostly all brokers have some swap.
Usually, the swap is a very small amount, so mostly we don’t care about it. But when it comes to Wednesday night the swap is charged 3 times. So, the condition is if you want to earn more and pay less if you open a sell position close it before Wednesday so that minimal swap is charged.
Swap and Forex Trading
Swap is the value of interest added or reduced from the account. It is suggested to not hold a trade overnight. Even if you are new you might not be aware of swap or you will not be able to see it if you don’t trade overnight. The difference is the amount is not noticeable if it is very less.
Conclusion
To conclude the above discussion would like to say that most the broker do charge swap and there are some brokers who don’t charge the swap at all though that doesn’t mean that the broker is good if they are not charging swap while choosing broker all factors are needed to be analyzed. And overall, in simple, the definition of swap is the overnight interest fee.