When I am reading materials in swap point calculation for FX Tom/Next Rollover, I am confused with the market interest rate bid/ask.
Using an example:
I traded on Aug 7, 2019
Short 5,000,000
USDJPY
, the closing price (spot rate)
of the position is 119.94000
Market Interest Rates
+-----+------------+-------------+
| | BID | ASK |
+---+--------------+-------------+
| JPY | -0.11% | -0.09% |
| USD | 0.100% | 0.130% |
+-----+------------+-------------+
What does the above interest rates mean with the bid/ask? Especially when this is applied to the formula below:
$Bid Side Swap Point = Spot Rate \cdot (\dfrac{1+VCBR\cdot\dfrac{SwapDays}{360 or 365}}{1+BCLR\cdot\dfrac{SwapDays}{360 or 365}}-1)$ $Ask Side Swap Point = Spot Rate \cdot (\dfrac{1+VCLR\cdot\dfrac{SwapDays}{360 or 365}}{1+BCBR\cdot\dfrac{SwapDays}{360 or 365}}-1)$
$VCBR = Value Currency Borrow Rate$
$VCLR = Value Currency Lend Rate$
$BCBR = Base Currency Borrow Rate$
$BCLR = Base Currency Lend Rate$
In this case, we are shorting USDJPY, which means we hold JPY and sell USD, so does this mean, we are borrowing JPY and lending out USD? The calculation result shows:
$Bid Side Swap Point = Spot Rate \cdot (\dfrac{1+JPY Int. Bid\cdot\dfrac{1 SwapDay}{360}}{1+USD Int. Ask\cdot\dfrac{1 SwapDay}{360}}-1)$
$Bid Side Swap Point = 119.9400 \cdot (\dfrac{1+(-0.11%)\cdot\dfrac{1}{360}}{1+0.130%\cdot\dfrac{1}{360}}-1) = -0.0008$
I am confused why we are using the JPY interest rate BID -0.11% and USD interest rate ASK 0.130%. Is there any reason or logic? Why BID interest is the one used for the currency we long, and ASK interest is the one used for the currency we short?
Also, when broker applies client mark-up to the Market Interest Rates table, for instance a client mark-up of 0.0045
is applied, then the interest rate table becomes:
+-----+------------+-------------+
| | BID | ASK |
+---+--------------+-------------+
| JPY | -0.56% | -0.36% |
| USD | -0.350% | 0.580% |
+-----+------------+-------------+
The only thing I could figure out is that on the BID side, we are using the following formula:
JPY MAX(-0.11% - 0.0045, 0)=-0.56%' and USD 'MAX(0.100% - 0.0045, 0)=-0.350%
and on the ASK side we are using:
JPY MAX(-0.09% + 0.0045, 0)=-0.36%' and USD 'MAX(0.130% - 0.0045, 0)=0.580%
Is there any reason or logic when a broker applies client mark-up to increase the spread of bid/ask? Why we are using these formulas? In this sense, BID for JPY is the interest rate that the position holder pays for holding it? Or it is the ASK?