Swap explained: fixed vs floating and FX swaps definition
By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.
Quick answer
A swap is an over-the-counter derivative where two counterparties agree to exchange cash flows over a set period. The two main families are interest rate swaps, which exchange fixed for floating payments on a notional principal, and currency swaps, which exchange principal and interest in two different currencies.
What is swap?
A swap is a bilateral derivative contract in which two parties exchange streams of cash flows according to a pre-agreed schedule. The most common variant is the interest rate swap, where one leg pays a fixed rate on a notional principal and the other pays a floating rate referenced to SOFR, SONIA, EURIBOR or similar benchmarks. Currency swaps additionally exchange principal amounts in two currencies at inception and maturity, with periodic interest payments in each currency. Swaps trade over the counter, are typically cleared through central counterparties post-Dodd-Frank, and form the deepest segment of the global derivatives market by notional outstanding.
How traders use swap
Retail forex traders encounter swaps primarily as the overnight financing charge or credit applied when a position is held past the broker’s rollover cut-off, which reflects the interest rate differential between the two currencies in the pair. Carry traders structure positions to earn positive swap on long high-yield, short low-yield pairs. Institutional desks use interest rate swaps to hedge balance sheet duration, convert fixed-rate debt into floating exposure, or express directional views on the path of central bank policy. Cross-currency basis swaps are central to bank funding markets and often signal stress when the basis widens sharply. Macro funds watch the swap curve, particularly the 2s10s and forward starting swaps, as a clean read on rate expectations.
Common misconceptions about swaps
The first misconception is that swap rates charged by retail brokers equal the underlying interbank rate differential. They rarely do; brokers add a spread, and some apply a third-day swap on Wednesdays to cover the weekend value date. The second is that swaps are inherently risky speculation. In institutional use they are predominantly hedging instruments. The third is that the notional principal changes hands in an interest rate swap. It does not; only the net interest payment is settled, which is why notional outstanding figures dwarf actual capital at risk.
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Frequently asked
What is the difference between a swap and a forward?
A forward is a single exchange of cash flows or assets at one future date, settled once. A swap is a series of exchanges across multiple dates over the life of the contract. An FX swap, confusingly named, is closer to a forward in structure: it combines a spot transaction with a single offsetting forward leg, used mainly for short-term funding and rolling currency exposure rather than long-dated hedging.
Why do I pay swap on some forex positions and earn it on others?
The sign of the swap depends on the interest rate differential between the two currencies in the pair and the direction of your position. Holding the higher-yielding currency long against a lower-yielding currency typically generates positive swap credit. Holding the lower-yielding currency long generates a debit. Broker markups, weekend triple-swap conventions and basis swap spreads can shift the net outcome, so the realised figure rarely matches the headline policy rate gap.
Are swaps regulated?
Yes. Following the 2008 financial crisis, the Dodd-Frank Act in the United States and EMIR in the European Union introduced mandatory central clearing for standardised interest rate swaps, trade reporting to repositories, and margin requirements for uncleared bilateral swaps. The Commodity Futures Trading Commission oversees most swap activity in the US, while ESMA coordinates the European framework. Retail FX swap charges fall under the broker’s regulatory regime rather than swap-specific rules.
What is a cross-currency basis swap?
A cross-currency basis swap exchanges floating interest payments in two different currencies, plus principal at start and maturity. The basis is the spread added to one leg to make the trade fair value, reflecting supply and demand for one currency’s funding versus another. A persistently negative EUR/USD basis, for example, indicates dollar funding scarcity for euro-area banks, a recurring stress signal monitored closely by central banks.
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