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In the Foreign Exchange market,
each transaction carries an assigned value date. This value
date is the date in which the buying or selling actions will
realize their value and demand a settlement of payment. This
value date typically falls 2 business days after the transaction
was executed. The profits or losses produced by the buying
and selling actions will then settle into the specific cash
account. What this means to the foreign currency trader is
that when you take a position in a foreign currency it is
implied that you will take actual delivery of the currency
in two days. However, the majority of individuals that trade
the forex market are speculating and have no intention of
taking delivery on the currency. This is where the Next Day
procedures come into play.
If a trader holds a position past the close of the current
business day, the position must be covered and carried over
into the next day, unless actual delivery of the currency
is desired. The position that the client holds is closed out
at a predetermined closing rate, and reestablished at a new
opening rate. This action assigns the newly opened position
a new value date and allows the client to hold this position
another day without taking delivery of the currency. A swap
procedure is performed on all current open positions, all
open positions are closed out at a closing rate, which is
the rate that each particular currency market is at during
this time frame. During the swap procedure all open positions
are closed at the closing rate, and any profits or losses
that are a part of Floating P/L are moved into Unrealized
P/L.
The closed position is then reestablished at a new opening
rate. This rate is determined by the price the position was
closed out at plus or minus an interest payment. This swap
happens instantly and is either going to demand a small interest
payment by the trader or a small interest payment paid to
the trader dependant upon which foreign currency the trader
is holding. If you are holding the currency with the higher
rate of interest then you will receive an interest payment.
If you are holding the foreign currency with the lower rate
of interest you will pay an interest payment. These payments
are paid or received during the establishment of the new opening
rate, in the form of a better or worse new price after the
swap has taken place.
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