Tom-next, swap points, and why exotic carry looks better than it is

[Shadow Trader]

Swap, the overnight charge or credit, comes from the difference in interest rates between two currencies, passed through the forward market. The mechanism is called tom-next: tomorrow to next day.

On majors, swap is predictable and small. On exotics like USDTRY or USDMXN, the interest differential is large, so a long position in the high-yield currency shows a sizable positive swap on the platform. It looks like a gift.

The catch: brokers pass on only part of the credit, and charge the full cost on the other side. Both long and short positions can show negative swap on exotic pairs, because the broker's markup exceeds the differential.

Also, the high-yield currency usually depreciates over time. The carry looks attractive, but the exchange rate tends to eat it. A position that earns 0.3 percent per month in swap can lose 3 percent in price during a bad week.

For short-term trading, swap rarely matters, but for anything held through rollover, it should be read before entry, not after.

To get a sense of the real cost of carry, compare the swap shown on the platform with the interest rate differential implied by the forward points on a reference source. The difference between the two is the broker's margin on the financing. It's often bigger on exotics, sometimes by several multiples.

For a position held a few hours, none of this matters. For positions that cross the rollover regularly, the monthly swap bill is a line item that deserves its own column in the journal. Seeing the cumulative figure often prompts a reconsideration of which trades are worth carrying overnight and which should be closed before 5pm New York.

Which exotic pairs have shown the strangest swap numbers on the platform used here?