A forward exchange rate is often introduced as a spot rate adjusted for the interest-rate difference between two currencies. The arithmetic is useful, but a central bank policy rate is not necessarily the rate at which a dealer can borrow, lend, or exchange cash for a particular settlement date. Consequently, observed FX swap points can depart from a calculation that appears straightforward on paper.
For fx trading, the important question is which funding rates, dates, and transaction prices actually underpin the quoted forward. Five sources of divergence deserve separate attention.
Policy Rates Are Not Tradable Funding Rates
A textbook calculation may insert two central bank benchmark rates into a forward-pricing formula. Dealers instead face market funding curves, collateral arrangements, and credit-sensitive borrowing conditions. Even where policy rates remain unchanged, short-term money-market rates can move as banks adjust their demand for cash.
For a currency pair quoted as domestic currency per unit of foreign currency, a simplified forward relationship uses the domestic interest factor in the numerator and the foreign factor in the denominator. Choosing the wrong rates, or reversing their positions, can produce an apparently precise but economically incorrect estimate.
Settlement Calendars Can Change the Accrual Period
Spot and forward value dates depend on currency-specific business days. A public holiday in either settlement center can shift the date on which funds actually change hands. A one-week swap is therefore not always equivalent to seven calendar days of interest accrual measured from the trade date.
Day-count conventions add another complication. Some money-market rates use actual days divided by 360; others use 365. A comparison that ignores the relevant conventions may attribute a routine calendar effect to unusual demand for dollars or another funding currency.
Bid-Ask Quotes Can Overstate an Apparent Pricing Anomaly
Imagine a hypothetical three-month USD/CAD transaction when spot is 1.3700 Canadian dollars per US dollar. Assume annualized CAD funding of 4.0%, USD funding of 5.0%, and a 90-day period using a 360-day convention. A simplified midmarket calculation gives a forward of approximately 1.36661, or minus 33.9 points when one point is 0.0001.
A dealer might instead quote forward outright prices of 1.3663 bid and 1.3669 ask. Buying $500,000 forward at the ask requires CAD 683,450 at maturity, compared with roughly CAD 683,305 at the theoretical midpoint, a CAD 145 difference. The gap does not by itself establish mispricing: executable quotes incorporate transaction spreads and may be based on different live funding inputs.
Balance-Sheet Demand Can Move Swap Points Beyond Rate Differentials
Banks and institutional investors sometimes need one currency immediately while holding liquidity in another. Their hedging and funding flows can shift the cross-currency basis away from the level implied by simplified covered interest parity.
During reporting dates or concentrated refinancing periods, dealers may charge more for balance-sheet capacity. In fx trading, a more expensive swap can emerge even without a policy-rate announcement. An unchanged spot chart does not mean the cost of carrying currency exposure is unchanged.
Retail Rollover Terms Need Not Match Wholesale Swap Points
A broker’s overnight adjustment on a currency CFD may draw on wholesale swap markets, but the resulting client charge can also include markups, administrative rules, and special treatment for weekends or holidays. The quoted swap points on an institutional forward are therefore not a direct promise of the amount credited or debited to a retail account.
Before opening a currency CFD, identify the pair’s quotation direction, verify the applicable value dates and day-count basis, compare executable bid and ask forward prices, and inspect the broker’s long and short rollover schedules. Calculate the expected charge over the intended holding period rather than treating a policy-rate differential as the final cost.
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