Simulating Variable FX Swap Costs from Interest Rate Differentials
Summary
The article demonstrates how to estimate historical FX rollover payments using central bank policy rates, a broker charge, and currency conversion. It implements the calculations in both Zorro and Python. The long and short roll estimates depend on the base-versus-quote interest-rate differential, with the sign reversed by trade direction; the results are adjusted for broker costs and, where needed, converted into the account currency.
The examples retrieve policy-rate histories for major currencies, carry missing observations forward in the Python workflow, and plot swap estimates for selected currency pairs. The code treats broker charges as assumptions and explicitly notes that actual fees can vary by broker, pair, and direction. Policy rates are only inputs to an approximation of FX swaps, so these calculations need not match a broker’s realized financing schedule. The excerpt gives implementation examples but no validation against observed account charges or evidence of a profitable strategy.
Key ideas
- FX roll estimates can be built from the base and quote currencies’ interest-rate differential.
- Long and short positions use opposite signs for the rate differential.
- Broker charges reduce the calculated roll and may vary across pairs and directions.
- Estimated roll must be converted when the trading account currency differs from the quote currency.
- Historical policy rates provide a simulation input but may not reproduce actual broker financing terms.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.