A number of firms are presently offering options on off-exchange
foreign currency contracts. Buying and selling forex options pres-
ent additional risks, many of which are similar to those inherent
in buying options on futures contracts. Therefore, you should
consult NFA’s brochure, Buying Options on Futures Contracts:
A Guide to Uses and Risks, which discusses the mechanics and
risks of options trading.
There are two significant differences between buying off-exchange
forex options and buying options on futures contracts. First, when
you exercise an option on an exchange-traded futures contract, you
receive the underlying exchange-traded futures contract. When
you exercise an off-exchange forex option, you will probably receive
either a cash payment or a position in the underlying currency.
Second, NFA’s options brochure only discusses American-style
options, which can be exercised at any time before they expire.
Many forex options are European-style options, which can be exer-
cised only on or near the expiration date. You should understand
which type of option you are purchasing
Minggu, 15 Agustus 2010
How do I calculate profits and losses?
When you close out a trade, you can calculate your profits and
losses using the following formula:
Price (exchange rate) when selling the base currency – price
when buying the base currency X transaction size = profit
or loss
Assume you buy Euros (EUR/USD) at 1.2178 and sell Euros at
1.2188. If the transaction size is 100,000 Euros, you will have a
$100 profit.
($1.2188 – $1.2178) X 100,000 = $.001 X 100,000 = $100
Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros
at 1.2180, you will have a $100 loss.
($1.2170 – $1.2180) X 100,000 = – $.001 X 100,000 = – $100
You can also calculate your unrealized profits and losses on open
positions. Just substitute the current bid or ask rate for the action
you will take when closing out the position. For example, if you
bought Euros at 1.2178 and the current bid rate is 1.2173, you
have an unrealized loss of $50.
($1.2173 – $1.2178) X 100,000 = – $.0005 X 100,000 = – $50
Similarly, if you sold Euros at 1.2170 and the current ask rate is
1.2165, you have an unrealized profit of $50.
($1.2170 – $1.2165) X 100,000 = $.0005 X 100,000 = $50
If the quote currency is not in US dollars, you will have to con-
vert the profit or loss to US dollars at the dealer’s rate. Further, if
the dealer charges commissions or other fees, you must subtract
those commissions and fees from your profits and add them to
your losses to determine your true profits and losses.
How much money do I need to trade forex?
Forex dealers can set their own minimum account sizes, so you will
have to ask the dealer how much money you must put up to begin
trading. Most dealers will also require you to have a certain amount
of money in your account for each transaction. This security
deposit, sometimes called margin, is a percentage of the transaction
value and may be different for different currencies. A security
deposit acts as a performance bond and is not a down payment or
partial payment for the transaction.
Dealers who are regulated by NFA are required to calculate and
collect security deposits that equal or exceed the percentage set by
NFA rules. Although the percentage of the security deposit remains
constant, the dollar amount of the security deposit will change
with changes in the value of the currency being traded
losses using the following formula:
Price (exchange rate) when selling the base currency – price
when buying the base currency X transaction size = profit
or loss
Assume you buy Euros (EUR/USD) at 1.2178 and sell Euros at
1.2188. If the transaction size is 100,000 Euros, you will have a
$100 profit.
($1.2188 – $1.2178) X 100,000 = $.001 X 100,000 = $100
Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros
at 1.2180, you will have a $100 loss.
($1.2170 – $1.2180) X 100,000 = – $.001 X 100,000 = – $100
You can also calculate your unrealized profits and losses on open
positions. Just substitute the current bid or ask rate for the action
you will take when closing out the position. For example, if you
bought Euros at 1.2178 and the current bid rate is 1.2173, you
have an unrealized loss of $50.
($1.2173 – $1.2178) X 100,000 = – $.0005 X 100,000 = – $50
Similarly, if you sold Euros at 1.2170 and the current ask rate is
1.2165, you have an unrealized profit of $50.
($1.2170 – $1.2165) X 100,000 = $.0005 X 100,000 = $50
If the quote currency is not in US dollars, you will have to con-
vert the profit or loss to US dollars at the dealer’s rate. Further, if
the dealer charges commissions or other fees, you must subtract
those commissions and fees from your profits and add them to
your losses to determine your true profits and losses.
How much money do I need to trade forex?
Forex dealers can set their own minimum account sizes, so you will
have to ask the dealer how much money you must put up to begin
trading. Most dealers will also require you to have a certain amount
of money in your account for each transaction. This security
deposit, sometimes called margin, is a percentage of the transaction
value and may be different for different currencies. A security
deposit acts as a performance bond and is not a down payment or
partial payment for the transaction.
Dealers who are regulated by NFA are required to calculate and
collect security deposits that equal or exceed the percentage set by
NFA rules. Although the percentage of the security deposit remains
constant, the dollar amount of the security deposit will change
with changes in the value of the currency being traded
How do I close out a trade?
Retail forex transactions are normally closed out by entering into
an equal but opposite transaction with the dealer. For example, if
you bought Euros with U.S. dollars, you would close out the trade
by selling Euros for U.S. dollars. This is also called an offsetting or
liquidating transaction.
Most retail forex transactions have a settlement date when the
currencies are due to be delivered. If you want to keep your posi-
tion open beyond the settlement date, you must roll the position
over to the next settlement date. Some dealers roll open positions
over automatically, while other dealers may require you to request
the rollover. Most dealers charge a rollover fee based upon the
interest rate differential between the two currencies in the pair.
You should check your agreement with the dealer to see what, if
anything, you must do to roll a position over and what fees you
will pay for the rollover.
an equal but opposite transaction with the dealer. For example, if
you bought Euros with U.S. dollars, you would close out the trade
by selling Euros for U.S. dollars. This is also called an offsetting or
liquidating transaction.
Most retail forex transactions have a settlement date when the
currencies are due to be delivered. If you want to keep your posi-
tion open beyond the settlement date, you must roll the position
over to the next settlement date. Some dealers roll open positions
over automatically, while other dealers may require you to request
the rollover. Most dealers charge a rollover fee based upon the
interest rate differential between the two currencies in the pair.
You should check your agreement with the dealer to see what, if
anything, you must do to roll a position over and what fees you
will pay for the rollover.
What transaction costs will I pay?
Although dealers who are regulated by NFA must disclose their
charges to retail customers, there are no rules about how a dealer
charges a customer for the services the dealer provides or that limit
how much the dealer can charge. Before opening an account, you
should check with several dealers and compare their charges as well
as their services. If you were solicited by or place your trades
through someone other than the dealer, or if your account is man-
aged by someone, you may be charged a separate amount for the
third party’s services.
Some firms charge a per trade commission, while other firms
charge a mark-up by widening the spread between the bid and ask
prices they give their customers. In the earlier example, assume that
the dealer can get a EUR/USD spread of 1.2173/75 from a bank.
If the dealer widens the spread to 1.2170/78 for its customers, the
dealer has marked up the spread by .0003 on each side.
Some firms may charge both a commission and a mark-up. Firms
may also charge a different mark-up for buying the base currency
than for selling it. You should read your agreement with the dealer
carefully and be sure you understand how the firm will charge you
for your trades.
charges to retail customers, there are no rules about how a dealer
charges a customer for the services the dealer provides or that limit
how much the dealer can charge. Before opening an account, you
should check with several dealers and compare their charges as well
as their services. If you were solicited by or place your trades
through someone other than the dealer, or if your account is man-
aged by someone, you may be charged a separate amount for the
third party’s services.
Some firms charge a per trade commission, while other firms
charge a mark-up by widening the spread between the bid and ask
prices they give their customers. In the earlier example, assume that
the dealer can get a EUR/USD spread of 1.2173/75 from a bank.
If the dealer widens the spread to 1.2170/78 for its customers, the
dealer has marked up the spread by .0003 on each side.
Some firms may charge both a commission and a mark-up. Firms
may also charge a different mark-up for buying the base currency
than for selling it. You should read your agreement with the dealer
carefully and be sure you understand how the firm will charge you
for your trades.
How does the off-exchange currency market work?
The off-exchange forex market is a large, growing and liquid finan-
cial market that operates 24 hours a day. It is not a market in the
traditional sense because there is no central trading location or
“exchange.” Most of the trading is conducted by telephone or
through electronic trading networks.
The primary market for currencies is the “interbank market”
where banks, insurance companies, large corporations and
other large financial institutions manage the risks associated
with fluctuations in currency rates. The true interbank market
is only available to institutions that trade in large quantities
and have a very high net worth.
In recent years, a secondary OTC market has developed that per-
mits retail investors to participate in forex transactions. While this
secondary market does not provide the same prices as the interbank
market, it does have many of the same characteristics
cial market that operates 24 hours a day. It is not a market in the
traditional sense because there is no central trading location or
“exchange.” Most of the trading is conducted by telephone or
through electronic trading networks.
The primary market for currencies is the “interbank market”
where banks, insurance companies, large corporations and
other large financial institutions manage the risks associated
with fluctuations in currency rates. The true interbank market
is only available to institutions that trade in large quantities
and have a very high net worth.
In recent years, a secondary OTC market has developed that per-
mits retail investors to participate in forex transactions. While this
secondary market does not provide the same prices as the interbank
market, it does have many of the same characteristics
What are foreign currency exchange rates?
Foreign currency exchange rates are what it costs to exchange one
country’s currency for another country’s currency. For example, if
you go to England on vacation, you will have to pay for your hotel,
meals, admissions fees, souvenirs and other expenses in British
pounds. Since your money is all in US dollars, you will have to use
(sell) some of your dollars to buy British pounds.
Assume you go to your bank before you leave and buy $1,000
worth of British pounds. If you get 565.83 British pounds
(£565.83) for your $1,000, each dollar is worth .56583 British
pounds. This is the exchange rate for converting dollars to pounds.
If £565.83 isn’t enough cash for your trip, you will have to
exchange more US dollars for pounds while in England. Assume
you buy another $1,000 worth of British pounds from a bank in
England and get only £557.02 for your $1,000. The exchange rate
for converting dollars to pounds has dropped from .56583 to
.55702. This means that US dollars are worth less compared to the
British pound than they were before you left on vacation.
Assume that you have £100 left when you return home. You go to
your bank and use the pounds to buy US dollars. If the bank gives
you $179.31, each British pound is worth 1.7931 dollars. This is
the exchange rate for converting pounds to dollars.
Theoretically, you can convert the exchange rate for buying a cur-
rency to the exchange rate for selling a currency, and vice versa, by
dividing 1 by the known rate. For example, if the exchange rate for
buying British pounds with US dollars is .56011, the exchange rate
for buying US dollars with British pounds is 1.78536 (1 ÷ .56011
= 1.78536). Similarly, if the exchange rate for buying US dollars
with British pounds is 1.78536, the exchange rate for buying
British pounds with US dollars is .56011 (1÷ 1.78536 = .56011).
This is how newspapers often report currency exchange rates.
As a practical matter, however, you will not be able to buy and sell
the currency at the same price, and you will not receive the price
quoted in the newspaper. This is because banks and other market
participants make money by selling the currency to customers for
more than they paid to buy it and by buying the currency from
customers for less than they will receive when they sell it.
country’s currency for another country’s currency. For example, if
you go to England on vacation, you will have to pay for your hotel,
meals, admissions fees, souvenirs and other expenses in British
pounds. Since your money is all in US dollars, you will have to use
(sell) some of your dollars to buy British pounds.
Assume you go to your bank before you leave and buy $1,000
worth of British pounds. If you get 565.83 British pounds
(£565.83) for your $1,000, each dollar is worth .56583 British
pounds. This is the exchange rate for converting dollars to pounds.
If £565.83 isn’t enough cash for your trip, you will have to
exchange more US dollars for pounds while in England. Assume
you buy another $1,000 worth of British pounds from a bank in
England and get only £557.02 for your $1,000. The exchange rate
for converting dollars to pounds has dropped from .56583 to
.55702. This means that US dollars are worth less compared to the
British pound than they were before you left on vacation.
Assume that you have £100 left when you return home. You go to
your bank and use the pounds to buy US dollars. If the bank gives
you $179.31, each British pound is worth 1.7931 dollars. This is
the exchange rate for converting pounds to dollars.
Theoretically, you can convert the exchange rate for buying a cur-
rency to the exchange rate for selling a currency, and vice versa, by
dividing 1 by the known rate. For example, if the exchange rate for
buying British pounds with US dollars is .56011, the exchange rate
for buying US dollars with British pounds is 1.78536 (1 ÷ .56011
= 1.78536). Similarly, if the exchange rate for buying US dollars
with British pounds is 1.78536, the exchange rate for buying
British pounds with US dollars is .56011 (1÷ 1.78536 = .56011).
This is how newspapers often report currency exchange rates.
As a practical matter, however, you will not be able to buy and sell
the currency at the same price, and you will not receive the price
quoted in the newspaper. This is because banks and other market
participants make money by selling the currency to customers for
more than they paid to buy it and by buying the currency from
customers for less than they will receive when they sell it.
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