Forex
trading examples
Example 1
An investor has a margin deposit
with Saxo Bank of USD 100,000.
The investor expects the US
dollar to rise against the Swiss franc and therefore decides to
buy USD 2,000,000 - 2% of his maximum possible exposure at a 1%
margin Forex gearing.
The Saxo Bank dealer quotes him
1.5515-20. The investor buys USD at 1.5520.
Day 1: Buy USD 2,000,000 vs CHF
1.5520 = Sell CHF 3,104,000.
Four days later, the dollar has
actually risen to CHF 1.5745 and the investor decides to take his
profit.
Upon his request, the Saxo Bank
dealer quotes him 1.5745-50. The investor sells at 1.5745.
Day 5: Sell USD 2,000,000 vs CHF
1.5745 = Buy CHF 3,149,000.
As the dollar side of the
transaction involves a credit and a debit of USD 2,000,000, the
investor's USD account will show no change. The CHF account will
show a debit of CHF 3,104,000 and a credit of CHF 3,149,000. Due
to the simplicity of the example and the short time horizon of the
trade, we have disregarded the interest rate swap that would
marginally alter the profit calculation.
This results in a profit of CHF
45,000 = approx. USD 28,600 = 28.6% profit on the deposit of USD
100,000.
Example 2:
The investor follows the cross
rate between the EUR o and the Japanese yen. He believes that this
market is headed for a fall. As he is not quite confident of this
trade, he uses less of the leverage available on his deposit. He
chooses to ask the dealer for a quote in EUR 1,000,000. This
requires a margin of EUR 1,000,000 x 5% = EUR 10,000 = approx. USD
52,500 (EUR /USD 1.05).
The dealer quotes 112.05-10. The
investor sells EUR at 112.05.
Day 1: Sell EUR 1,000,000 vs JPY
112.05 = Buy JPY 112,050,000.
He protects his position with a
stop-loss order to buy back the EUR o at 112.60. Two days later,
this stop is triggered as the EUR o strengthens short term in
spite of the investor's expectations.
Day 3: Buy EUR 1,000,000 vs JPY
112.60 = Sell JPY 112,600,000.
The EUR side involves a credit
and a debit of EUR 1,000,000. Therefore, the EUR account shows no
change. The JPY account is credited JPY 112.05m and debited JPY
112.6m for a loss of JPY 0.55m. Due to the simplicity of the
example and the short time horizon of the trade, we have
disregarded the interest rate swap that would marginally alter the
loss calculation.
This results in a loss of JPY
0.55m = approx.USD 5,300 (USD/JPY 105) = 5.3% loss on the original
deposit of USD 100,000.
Example 3
The investor believes the
Canadian dollar will strengthen against the US dollar. It is a
long term view, so he takes a small position to allow for wider
swings in the rate:
He asks Saxo Bank for a quote in
USD 1,000,000 against the Canadian dollar. The dealer quotes
1.5390-95 and the investors sells USD at 1.5390. Selling USD is
the equivalent of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs CAD
1.5390. He swaps the position out for two months receiving a
forward rate of CAD 1.5357 = Buy CAD 1,535,700 for Day 61 due to
the interest rate differential.
After a month, the desired move
has occurred. The investor buys back the US dollars at 1.4880. He
has to swap the position forward for a month to match the original
sale. The forward rate is agreed at 1.4865.
Day 31: Buy USD 1,000,000 vs CAD
1.4865 = Sell CAD 1,486,500 for Day 61.
Day 61: The two trades are
settled and the trades go off the books. The profit secured on Day
31 can be used for margin purposes before Day 61.
The USD account receives a credit
and debit of USD 1,000,000 and shows no change on the account. The
CAD account is credited CAD 1,535,700 and debited CAD 1,486,500
for a profit of CAD 49,200 = approx. USD 33,100 = profit of 33.1%
on the original deposit of USD 100,000.
