Trading margin FX

What is margin FX?

FX, or foreign exchange, trading is the buying of one currency and selling of another.

Margin FX trading is the simultaneous buying of one currency and selling of another. Currencies are quoted in pairs, such as the Euro vs the US dollar. When one currency increases in value, it strengthens against the other, which in turn decreases the other’s value.

There are five major global currencies, although there are many more available to trade. These five are:

• US dollar (USD)
• Euro (EUR)
• British pound (GBP)
• Swiss franc (CHF)
• Japanese yen (JPY)

All currencies are traded as pairs and quoted in one of two ways:

• In terms of the US dollar (USD).
  For example, USD/AUD, or US dollar vs Australian dollar, or
• In terms of each other, or 'cross rates'.
  For example AUD/EUR, or Australian dollar vs Euro.

FX is popular with traders for a number of reasons

• FX is an over-the-counter (OTC) market, which means trades do not take place through a centralised exchange.
  Therefore, FX trading takes place around the world 24 hours a day.
• The FX market is more liquid than any other financial market. This means clients have access to larger volumes,
  tight dealing spreads and lower margin rates.
• FX markets can be very volatile, creating plenty of opportunities to trade.

Two margin FX trading examples

Read moreA typical margin FX trade

For the purposes of this example, the AUD/USD rate is quoted at ‘0.7500/04’, which represents the bid/offer spread for AUD vs USD.

• The offer rate of 0.7504 is the rate at which you can purchase AUD (or BUY AUD and SELL USD).
• The bid rate of 0.7500 is the rate at which you can Sell AUD to buy USD.

Your opening position

You believe the Australian Dollar will strengthen against the US Dollar, so you decide to BUY (or ‘go long’) A$100,000 @ 0.7504 (the offer price).

Quote (bid/offer)	0.7500/04
Buy Price	0.7504
Volume	A$100,000
Initial outlay (using 1% margin)	A$1,000

In this example, you have purchased A$100,000. However, because FX CFDs are traded on margin with CMC Markets you only need A$1,000 (1%) to gain the same market exposure.

The risk on this AUD/USD trade is equivalent to US$10 for each point movement. Each point is valued at 0.0001. So, if the AUD/USD rate moves from 0.7504 to 0.7505 your profit will be US$10.

Your prediction is correct and the Australian Dollar appreciates against the US Dollar. The quote on AUD/USD is now 0.7590/94.

Your closing position

To close your position, you decide to SELL A$100,000 @ 0.7590 (the bid price).

Quote (bid/offer)	0.7590/94
Sell price	0.7590
Volume	A$100,000
Profit/loss	US$860 profit

Profit and loss is usually calculated in the secondary currency. Thus, the above AUD/USD trade profit/loss is calculated in US Dollars. You will only be charged a financing cost if you hold your position overnight.

How to calculate profit/loss

Size of trade	X	(sell price – buy price)	=	profit & loss USD
100,000	X	(0.7590 – 0.7504)	=	US$860 profit

Or, to convert the US$860 back to AUD at a rate of 0.7590

(Profit/loss ÷ AUD rate)	=	profit & loss AUD
(860 ÷ 0.7590)	=	A$1,133.07 profit

By closing your position, you realise a gross profit of A$1,133.07.

If you had anticipated incorrectly and sold AUD at 0.7500 and later bought AUD at 0.7594, you would have lost US$940.

Read moreHolding a position overnight

If you hold your position overnight you will incur a financing cost.

Rates are based on the official overnight cash rate, and this rate is subject to daily market fluctuations. For the purposes of this example, the AUD/USD is quoted at ‘0.7500/02’ and the current interest rates for the US and Australia are:

US	5.25%*
AUS	6.00%*

You buy A$100,000 @ 0.7502 and wish to hold this position overnight.

How to calculate the interest rate differential between the currency you are buying (AUD) and the currency you are selling (USD)

1. AUD

Value of AUD position x interest rate / 365 days	=	interest received in AUD
100,000 x 6.00% / 365	=	A$16.44

You receive A$16.44 on your long AUD position.

2. USD

Value of USD position x interest rate / 365 days / AUD/USD exchange rate	=	interest paid in AUD
US$75,020 x 5.25% / 365 / 0.7502	=	A$14.58

You pay A$14.58 on your short USD position.

3. Differential

Interest on AUD position – interest on USD position	=	interest rate differential
A$16.44 – A$14.58	=	A$1.86

You receive A$1.86 on your overnight position.

The cost/benefit (‘benefit’ in the example above) of the rollover is then reflected as forward points as specified in the FX market convention.

Investing in CFDs carries significant risks and may not be suitable for all investors. Losses can exceed your initial deposit. We therefore recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

References to all currencies are references to New Zealand dollars (NZD) unless otherwise specified. The content of this website does not constitute a recommendation and, consequently, you should consider the information in light of your objectives, financial situation and needs before making any decision about whether to acquire any CMC Markets financial product. A Disclosure Document is available at www.cmcmarkets.co.nz or by calling 09 359 1200 and should be considered prior to acquiring or continuing to hold CFDs. Information about our services, including our fees and charges is also available at those sources. CMC Markets NZ Limited (Company Registration Number 1705324).