Foreign currency Broker



Explain an example currency deal. Example 1 - deal between USD and JPY
An investor has a margin deposit of USD 10,000.

The investor expects the US dollar to rise against the Japanese Yen and therefore decides to buy USD 200,000 - 2% of his maximum possible exposure at a 1% margin Forex gearing.

The exchange rate is 119.055 -119.060. The investor buys USD at 119.060.

Day 1: Buy USD 200,000 vs JPY 1.5520 = Sell JPY 23,812,000.

Four days later, the dollar has actually risen to JPY 121.05 and the investor decides to take his profit.

Day 5: Sell USD 200,000 vs JPY 121.05 = Buy JPY 24,300,000.

As the dollar side of the transaction involves a credit and a debit of USD 200,000, the investor's USD account will show no change. The JPY account will show a debit of JPY 23,812,000 and a credit of JPY 24,300,000.

This results in a profit of JPY 488,000 = approx. USD 4,031.39 profit on the deposit of USD 10,000.

Example 2 deal between USD and CAD
An investor believes the Canadian dollar will strengthen against the US dollar in the long term.

Day 1: Sell USD 100,000 vs CAD 1.5390. He swaps the position out for two months receiving a forward rate of CAD 1.5357 = Buy CAD 153,570 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 100,000 vs CAD 1.4865 = Sell CAD 148,650 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 100,000 and shows no change on the account. The CAD account is credited CAD 153,570 and debited CAD 148,650 for a profit of CAD 4,920 = approx. USD 3,310 = profit of 33.1% on the original deposit of USD 10,000.


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