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Margin trading example on FOREX market
For example, the exchange rate USD to EUR is 1.2150 at the beginning of the working day at 10.30 a.m. on 24.08.2004 and your forecast is for EUR to fall during the day. Having a margin of 10 000 USD on your account you have an opportunity to make a deal with the Bank for the amount of 300 000 EUR. For instance, you have sold 300 000 EUR to the Bank in accordance with your forecast at 1.2150 at 10.30 a.m. with the spot value date, which is 26.08.2004. Your open position is:
-300 000 EUR
+364 500 USD (EUR amount multiplied by 1.2150)
Your forecast is EUR down to 1.2110. Therefore, you can place an order to buy 300,000 EUR back at 1.2110 or to watch the exchange fluctuation by yourself to make a decision to buy at any other moment.
At 12.40 a.m. the rate of EUR/USD fell down to 1.2110 in accordance with your forecast and you bought 300 000 EUR back from the Bank:
+300 000 EUR
-363 300 USD (EUR amount multiplied by 1.2110)
Thus, you closed your position by buying back EUR and selling 363 300 USD. As a result: your profit is 364 500 USD-363 300 USD = 1 200 USD.
Your collateral will make as at 26.08.2004:
10 000$ + 1200$ = 11 200$.
EUR/USD rate change graph as at 24/08/2004
In the event of an unfavourable rate fluctuation, if the rate of EUR had not fallen, but had risen to 1.2170 and you decided to close your position, you would have bought 300 000 EUR at the rate higher than upon the position opening.
+300 000 EUR
-365 100 USD (the amount in EUR multiplied by the rate 1.2170)
In this case, the difference would have made +364 500 USD-365 100 USD= - 600 USD. In that case, the amount of your margin will make as at 26.08.2004
10 000$ - 600$ = 9 400$
The above examples show that margin trading operation in the FOREX market gives an opportunity to earn on rate movement. Still, it should be remembered that your open position could bring losses when the rate movement forecast is made wrongly. You regulate yourself the amount of profit or loss which you are prepared for and wish to have, making decisions about opening or closing positions in accordance with the state of the market.
It is important to remember that in the event of an adverse change in the rate and a lack of collateral, the Bank has the right to close loss-making position using the procedure /Stop Out/ (General terms of transactions, Part II, Section 9, 4.3.1).