Trading Examples

When you trade margin foreign exchange products you are normally quoted a spot price. This means that if you take no further steps, your trade will be automatically rolled after one business day unless you initiate an equal and opposite transaction to close the position. Alternatively, you may wish to swap the trade forward to a later date. This may be anywhere from a week up to several months depending on the time frame of the investment.

Although a forward trade is for a future date, the position can be closed out at any time - the closing part of the position is then swapped forward to the same future value date.

When you trade, you may trade a combination of two currencies. For example, you will buy US dollars and sell EURO. Or buy EURO and sell Japanese yen, or any other combination of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening and one of them weakening.

When trading US dollars against Japanese yen, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD1,000,000. When closing the position, the opposite trade is done, again USD1,000,000. The profit or loss will be apparent in the change of the amount of yen credited and debited for the two transactions. In other words, your profit or loss will be denominated in Japanese yen that are known as the price currency. As part of our service, the principal will automatically exchange your profits and losses into your base currency if you require this.

This way of trading is different to the exchange traded derivative markets (futures markets), for example, where the EURO and yen are the fixed trade currencies, resulting in a US dollar denominated profit or loss. You can, however, also choose to trade in this reciprocal manner in foreign exchange markets but it is not the norm.

Examples for Spot and Forward contracts

(i) Trading Scenario – Trading Rising Prices

If you believe that the Euro will strengthen against the US dollar you’ll want to buy Euro now and sell it back later at a higher price.

(ii) Trading Scenario – Trading Falling Prices

Alternatively: you believe that the Euro will weaken against the US dollar,

you’ll want to sell Euro now and buy it back at a higher price.

However your expectations prove to be incorrect and you exit at a loss.

* Please note that the profit or loss is always expressed in the secondary currency.

(iii) Example for Margin Forex Option contracts

Example 1 – Buying a Put Option

With this example, you are expecting a fall in the dollar versus the yen (USDJPY)

In this example, you hold a USD put / JPY call option – or simply a USDJPY put. This gives you the right to sell USD (Put) and buy JPY (Call) at the price of 133.00. For this right, you are paying a premium of 70 JPY. Remember that when you are trading in currency pairs that you are always simultaneously buying/selling or selling/buying the two currencies. Therefore, currency options are simultaneously put/call options or vice versa.

In this scenario, the market price on the day you purchase the option is 133.80. When buying the option, you are speculating that the dollar will weaken significantly against the Yen and fall well under the 133 level in the coming days.

Let’s say that, as you have anticipated, the option expires in the money (in this case, below the 133 strike price, meaning that the option has intrinsic value on expiration), due to a significant decline in the USDJPY spot rate. The spot rate on exercise date, 6 March 2005 is say, 130.75.

To realise your profits, you exercise your right to sell at the 133 strike price to the seller or “writer” of the put option. Then you buy back USDJPY at the 130.75 market price to close the position and take the profit.

The profit scenario is then:

Strike price – closing spot price – premium i.e. 133.00 – 130.75 – 0.70 = JPY 1.55 profit

If the spot rate was quoted above the strike price (133.00), the option would have been out of the money and you would have lost your premium, but your risk in this transaction was limited to the premium and nothing more. As you can see, you can make unlimited profit but the maximum loss is the premium paid. Because you paid the 70 JPY premium up front, your break-even point is not simply the strike price of 133, but the difference of the strike price minus the premium, or 132.30