Margin and Leverage
Margin and leverage are concepts that go hand-in-hand in Forex trading. Trading “on margin” means the trader needs only deposit a percentage of the total funds required for a trade. Similarly, a deposit can be leveraged so that the trader can trade positions significantly larger than the amount he has in his account. These small movements can result in larger profits, or larger losses when compared to an unleveraged position.
Leverage = 1 / Margin => Margin = 1/ Leverage
For example, if leverage is 1:100 that means that for every quote currency note a trader puts up, he can trade the equivalent of 100 notes of the quote currency nominal in the major currency. Quote currency is the second currency in a quoted currency pair, where the base currency is the first currency in a quoted currency pair. For example, if you were looking at the EUR/USD currency pair, the Euro would be the base currency and the US dollar would be the quote currency. The price represents how much of the quote currency is needed for you to get one unit of the base currency.
For 1 lot (or 100,000 units) EUR/USD and an account leverage set to 1:100,
Margin = 100,000 / 100 = 1,000 USD
That means that a trader would need a least 1,000 USD to enter the trade.
If the quote currency in the pair being trader is the same as the account currency, the amount of margin used for every position opened is calculated by:
Margin Requirement = Current exchange rate x Lot Units x Margin
Or Margin Requirement = Current exchange rate x Lot Units / Leverage
If the base currency in the pair being trader is the same as the account currency, the amount of margin used for every position opened is calculated by:
Margin Requirement = Lot Units / Leverage
a. For 1 lot EUR/USD with a current exchange rate of 1.10 and leverage of 1:100 for a USD account.
Required margin = 100,000 x 1.10 x 0.01 = 1,100 USD
b. For 1 lot USD/CHF with current exchange rate of 1.0285 and leverage of 1:100 for a USD account.
Required margin = 100,000 x 0.01 = 1,000 USD
c. For 1 lot XAU/USD at spot price 1,070.10 and leverage 1:50 for a USD account. Gold contract size = 100 (1 lot of XAU/USD equals to 100 Units or 100 oz).
Required margin = 100 x 1,070.10 / 50 = 2,140.20 USD
d. For 1 lot EUR/CHF and leverage of 1:100 for a USD account.
Required margin = 100,000 x 0.01 = 1,000 EUR
If the current EUR/USD exchange rate is 1.10, then Required Margin = 1,000 x 1.10 = 1,100 USD
For Futures, the margin requirement is:
Margin Requirement = Opening Price x amount of lots x contract size / leverage
e. For 5 lots of Dow Jones 30 Index Futures with Opening Price = 16,500 USD and leverage 1:50 for a USD account. Dow Jones contract size = 5 USD.
Margin Requirement = 5 x 5 x 16,500 / 50 = 8,250 USD
When a trader’s account currency is the same as the quote (the second currency quoted in the currency pair), the pip value is calculated by:
Pip value = 1 Pip x Lot Size
a. For 1 lot EUR/USD with an account dominated in USD.
Pip value = 0.0001 x 100,000 = 10 USD
b. For 1 lot USD/JPY with an account dominated in JPY.
Pip value = 0.01 x 100,000 = 1,000 JPY
The pip value is always in the quote currency. Thus, when a trader’s account is denominated in a different currency that is not the same as the second currency, the calculation is as follows:
Pip value = One Pip x Lot Size / Exchange Rate, if the account currency is the same as the first currency on the exchange rate.
c. For 1 lot EUR/USD with an account denominated in EUR.
If the exchange rate is EUR/USD = 1.0710, then
Pip value = 0.0001 x 100,000 / 1.0710 = 10 / 1.0710 = 9.33 EUR
d. For 1 lot USD/JPY with an account denominated in USD.
If the exchange rate is USD/JPY = 123.20, then
Pip value = 0.01 x 100,000 / 123.20 = 1,000 / 123.20 = 8.11 USD
In the cases where the pair traded does not contain a currency same as the account base currency, then the calculation formula depends on the pair traded.
e. For 1 lot EUR/AUD with an account dominated in USD.
EUR/AUD = 1.5010
Pip value = 10 AUD = 10 / 1.5010 = 6.66 EUR (as pointed on the Example c)
EUR/USD = 1.0675
Pip value = 1.0675 x 6.66 = 7.109 USD
f. For 1 lot EUR/CHF with an account dominated in USD.
EUR/CHF = 1.0825
Pip value = 10 CHF
USD/CHF = 1.0150
Pip value = 10 / 1.0150 = 9.85 USD
Rollover / Swaps
A trader whose account is dominated in USD goes long (buy) 1 lot EUR/USD and the Rollover fee is -0.8 points per night. He opens his position on Monday and decides to close it on Thursday. The total Rollover in this case would be: Total Rollover = -0.8 x 0.0001 x 100,000 x 5 = -40 USD (since the Rollover fee is triple from Wednesday to Thursday).
Profit and Loss calculation
a. A trader buys (go long) 2 lots EUR/USD at 1.1045. He then decides to close the position at 1.1020. What would his PnL be? PnL = (Exchange rate in opening – Exchange rate in closing) x Lot Units = (1.1045 – 1.1020) x 200,000 = 500 USD.
Thus the client would have a loss of 500 USD
b. A trader sells (go short) 1.5 lot USD/JPY at 121.12. He then decides to close his position at 120.09. What would his PnL be?
PnL = (121.12 – 120.09) x 150,000 = 154,500 JPY
JPY = 154,500 / 120.09 = 1,286.5 USD
Thus the client would have a profit of 1,286.5 USD
c. A trader buys (go long) 1 lot EUR/USD at 1.0920 on Monday and decides to close the position on Thursday at 1.0980. If the swap rate was -0.8, that would his total PnL be?
PnL = (1.0980 – 1.0920) x 100,000 = 0.006 x 100,000 = 600 USD profit
Swap = -0.8 x 0.0001 x 100,000 x 5 days = -40 USD
Thus his total PnL = 600 – 40 = 560 USD