I know that every account starts with US dollars as base currency. However and I am confused about selling of other currencies.
Lets take an example...
I start with $1000 in my account. I then decide to sell GBP/USD currency pair and I am successful in doing so. Now, how was that transaction possible when I haven't got any GBP in my account, instead I have only $1000 - don't I need to buy GBP first and have it in my account in order to sell the GBP/USD pair?
Lets take another example...
I start with $1000 in my account. I then decide to sell GBP/AUD and am successful in doing so. How was that possible when my account only hold US dollars instead of GBP?
Please can anyone explain what goes on in the examples cited above.
I know that every account starts with US dollars as base currency.
Hi Slayer, there are brokers which accept different currencies as base currency. I use an EUR account for one.
Let's imagine this scenario, a bank in Japan can give me a loan with 0.5% interest per annum. And a bank in Australia can give me an interest of 5% per annum if I put my money with them.
Being the wise guy, i figure, hey why not I borrow from the Japan bank and put my money in the Australian bank and earn interest there? So I take a loan of 100 million yen, convert it to Aussie, and put it in their bank. So now I have 1.63 million Australian dollars earning interest in an Aussie bank.
This is how you can transact without using any USD per se. I have just made went long on AUDJPY; essentially selling the second currency and buying the first with that money.
Yet at the same time no bank would give you a loan without a guarantee right? So then they take 1% as 'safekeeping money'. (Actually I'm not too sure why we have margins but that is irrelevant to your question)
If I take out my money one day later, after the daily calculation of interest, I have an extra AUD$223.29 because of interest. (of course we now have to then calculate the yen's loan interest blahblah) but fundamentally you need to know that this is called swap/rollover and it happens at 5pm EST.
Not taking the interest into account, lets say the exchange rate jumps from 100Yen = 1.63 AUD to 100Yen = 1.62 AUD. With just the exchange rate alone, I have made 100 pips. I can cancel both loans/deposits and get more Yen than I put in. In a trading account, the pips will then be converted back into USD so it can be credited to my trading account.