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Example 1 :
An investor has a margin deposit with Saxo Bank of USD
100,000.
The investor expects the US dollar to rise against the Swiss
franc and therefore decides to buy USD 2,000,000 - 2% of his
maximum possible exposure at a 1% margin Forex gearing.
The Saxo Bank dealer quotes him 1.5515-20. The investor buys
USD at 1.5520.
Day 1: Buy USD 2,000,000 vs CHF 1.5520 = Sell CHF 3,104,000.
Four days later, the dollar has actually risen to CHF 1.5745
and the investor decides to take his profit.
Upon his request, the Saxo Bank dealer quotes him 1.5745-50.
The investor sells at 1.5745.
Day 5: Sell USD 2,000,000 vs CHF 1.5745 = Buy CHF 3,149,000.
As the dollar side of the transaction involves a credit and
a debit of USD 2,000,000, the investor's USD account will
show no change. The CHF account will show a debit of CHF
3,104,000 and a credit of CHF 3,149,000. Due to the
simplicity of the example and the short time horizon of the
trade, we have disregarded the interest rate swap that would
marginally alter the profit calculation.
This results in a profit of CHF 45,000 = approx. USD 28,600
= 28.6% profit on the deposit of USD 100,000.
Example 2 :
The investor follows the cross rate between the EUR o and
the Japanese yen. He believes that this market is headed for
a fall. As he is not quite confident of this trade, he uses
less of the leverage available on his deposit. He chooses to
ask the dealer for a quote in EUR 1,000,000. This requires a
margin of EUR 1,000,000 x 5% = EUR 10,000 = approx. USD
52,500 (EUR /USD 1.05).
The dealer quotes 112.05-10. The investor sells EUR at
112.05.
Day 1: Sell EUR 1,000,000 vs JPY 112.05 = Buy JPY
112,050,000.
He protects his position with a stop-loss order to buy back
the EUR o at 112.60. Two days later, this stop is triggered
as the EUR o strengthens short term in spite of the
investor's expectations.
Day 3: Buy EUR 1,000,000 vs JPY 112.60 = Sell JPY
112,600,000.
The EUR side involves a credit and a debit of EUR 1,000,000.
Therefore, the EUR account shows no change. The JPY account
is credited JPY 112.05m and debited JPY 112.6m for a loss of
JPY 0.55m. Due to the simplicity of the example and the
short time horizon of the trade, we have disregarded the
interest rate swap that would marginally alter the loss
calculation.
This results in a loss of JPY 0.55m = approx.USD 5,300
(USD/JPY 105) = 5.3% loss on the original deposit of USD
100,000.
Example 3
The investor believes the Canadian dollar will strengthen
against the US dollar. It is a long term view, so he takes a
small position to allow for wider swings in the rate:
He asks Saxo Bank for a quote in USD 1,000,000 against the
Canadian dollar. The dealer quotes 1.5390-95 and the
investors sells USD at 1.5390. Selling USD is the equivalent
of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs CAD 1.5390. He swaps the
position out for two months receiving a forward rate of CAD
1.5357 = Buy CAD 1,535,700 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 1,000,000 vs CAD 1.4865 = Sell CAD 1,486,500
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 1,000,000
and shows no change on the account. The CAD account is
credited CAD 1,535,700 and debited CAD 1,486,500 for a
profit of CAD 49,200 = approx. USD 33,100 = profit of 33.1%
on the original deposit of USD 100,000.
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