 |
Example of Foreign Exchange Margin Trading Transaction
|
15th September: You buy a USD / JPY contract (buy US dollars and sell Japanese yen) of USD500,000 at the exchange rate of 105.00, anticipating the USD to gain against the JPY.
|
| You Buy |
USD500,000 |
| You Sell |
JPY52,500,000 |
| @ FX Rate |
USD/JPY 105.00 |
| Settlement Date |
17th September |
|
| |
|
By 20th September: The USD has rallied to JPY106.00, as anticipated. You will make a profit by selling your USD and buying back JPY.
|
| You Sell |
USD500,000 |
| You Buy |
JPY53,000,000 |
| @ FX Rate |
USD/JPY 106.00 |
| Settlement
Date
|
22nd September |
|
| |
|
| Profit from the deal is JPY (53,000,000 - 52,500,000) |
USD500,000 |
| USD(500,000/106.00) |
| USD4,716.98 |
|
| |
|
Next, let us calculate the net interest earned from the deal:
|
| Interest Rate |
Debit |
Credit |
| USD |
5.6875% |
4.6875% |
| JPY |
1.02% |
0.02% |
|
| |
|
| Interest earned from buying USD
from 17th Sept to 22nd Sept
|
= USD500,000 X 4.6875% X 5/360 |
| = USD325.52 |
| Interest paid for selling JPY from 17th Sept to 22nd Sept |
= JPY52,500,000 X 1.02% X 5/360 |
| = JPY7,438 |
| = USD(7,438/106.00) |
| = USD70.17 |
| Net interest earned from the deal for the five days |
= USD325.52 - USD70.17 |
| = USD255.35 |
|
| |
|
Finally, let us calculate the interest earned from your margin deposit, assuming you have exactly USD50,000 at the time of account opening,
|
Interest earned from your margin deposit for the five days
|
= USD50,000 X 4.6875% X 5/360 |
| = USD32.55 |
|
| |
|
Total Return:
|
To conclude, total return
|
= USD4,716.98 + USD255.35 + USD32.55 |
| = USD5,004.88 |
|
| |
|
| On the contrary, trading losses will be incurred if you do the reverse of the above-mentioned example, i.e. you sell USD / JPY at 105.00 and buy back to limit your losses when the pair rallied to 106.00. |
|
| |
