Thursday, May 7, 2009

Getting Profits from the changing currency exchange rates

The easiest means to show the ability to gain from Forex trading as the exchange rate changes is to observe several examples. Let's begin by looking at how you may gain when exchange rates rise.

Let's presume that you believe that the European Dollar is going to rise against the US Dollar and that you can buy EUR/USD at 1.3296. We'll also assume that you are trading a standard InterBank lot of 100,000 so that 100,000 European Dollar will cost 132,960 US Dollars.

To open a trade you begin by borrowing 132,960 US Dollars, which you will have to pay back once you close out your position.

Assuming that you are right and that the European Dollar rises against the US Dollar and that the price moves 200 pips to a rate of 1.3496, the 100,000 UK Pounds which you purchased are now worth 134,960 US Dollars and you can close out your position and repay the original borrowing, leaving you with a profit of 2,000 US Dollars.

In the real world for sure it is not quite as easy as this because there will be transaction costs to pay. However, this does show the principle of profiting when exchange rate increase.

Now let's change our attention to profiting when the exchange rate falls.

Assume this time that you believe that the European Dollar will fall against the US Dollar from its current rate of EUR/USD = 1.3296. In plain language, you believe that the UK Pound is going to buy fewer US Dollars.

This time you will have to to put a sell order for 100,000 European Dollar at a cost of 132,960 US Dollars. In other words, you make use of 100,000 European Dollar and sell them for 132,960 US Dollars.

Assuming again that you are correct and that the rate falls by 200 pips to EUR/USD = 1.3096, you can now close your position by buying back and repaying the 100,000 European Dollars which you originally sold. In this instance this will now cost you 130,960 US Dollars and you will once more reach a gain of 2,000 US Dollars.

Again we have disregarded any transaction costs to plainly show the principle of profiting from a fall in exchange rates.

1 comment:

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