How do swaps work in trading?

Swaps are financial instruments that involve exchanging cash flows or liabilities between two parties. In the context of trading, particularly in Forex, a swap is the interest rate differential between two currencies that are held overnight. Traders may incur or receive swaps based on the interest rates of the currencies involved in their positions. Typically, if a trader holds a long position on a currency with a higher interest rate relative to a currency with a lower interest rate, the trader may receive a swap. Conversely, holding a position where the lower rate currency is bought may result in a debit to the trader. Swaps are calculated using the notional amount of the trade and the applicable interest rates, and they can significantly impact overall trading costs or profits.