Position value - please help!!!

[ukvipersden]

I am having real difficulty understanding the size of a position value. i would really appreciate some help here from you more experienced guys. I have taken the following example from Oanda's website just by way of example. The rate they use in the example is out of date but the position value and margin required of the trade does make sense.


OANDA FXTrade - Margin Rules

"You have set your maximum leverage to 50:1. Your Account is in USD and the current EUR/USD rate is 0.9134/36
The Position Value of 10,000 EUR/USD long is 10,000 EUR converted to USD, which is equal to 10,000 x 0.9136, or $9,136. The margin requirement for EUR/USD is 2% (when the account maximum leverage is set to 50:1). As a result, the margin required on this EUR/USD position is equal to $9,136 x 0.02, or $182.72."


But I am trying to work out the example of a GBP/YEN trade, using the above criteria, and the figures i am getting are incredible. Am i doing something wrong (I would be trading in GBP, not USD):

10,000 x 228.875 [current GBP/YEN rate] or £2,288,750. Therefore margin requirement is £2,288,750 x 0.02 or £45,775. Is this correct? I have calculated it using the exact same criteria and i get a staggering figure for both position size and margin requirements.

Thanks all.

[rhodytrader]

You always use the base currency in the pair to determine position size. In the case of EUR/USD, as the example showed, the position size was in EUR. You multiplied the position size by the exchange rate to get the USD value.

For a cross, it's the same deal, but you need to remember what to multiply by. In your GBP/JPY questoin, the base currency is GBP so that's what your position size is base. To get the USD value of the position you need to mutiply through by the GBP/USD exchange rate.

[ukvipersden]

Originally Posted by rhodytrader

You always use the base currency in the pair to determine position size. In the case of EUR/USD, as the example showed, the position size was in EUR. You multiplied the position size by the exchange rate to get the USD value.

For a cross, it's the same deal, but you need to remember what to multiply by. In your GBP/JPY questoin, the base currency is GBP so that's what your position size is base. To get the USD value of the position you need to mutiply through by the GBP/USD exchange rate.

thanks. does this mean that the calculations are correct as they stand? if so, that's a HUGE amount of money one needs to open up a GBP/JPY position - close to £2million!!! I will be trading in pounds/sterling, not dollars.

[rhodytrader]

No.

As I said you need to multiply your position size by GBP/USD, not by GBP/JPY.

If you multiply a GBP based position by GBP/JPY you get the JPY value of the position.

[ukvipersden]

Originally Posted by rhodytrader

No.

As I said you need to multiply your position size by GBP/USD, not by GBP/JPY.

If you multiply a GBP based position by GBP/JPY you get the JPY value of the position.

ok. i am slightly confused. it's my doing, not yours, you have been really helpful. i will be trading in GBP as i am a uk customer. i want to open a position on GPB/JPY. why do i have to multiply by gbp/usd to calculate the position size. Is this not at odds with Oanda's own example (albeit they are using the example of eur/usd). thanks.

[ukvipersden]

rhody, would this be correct (i mean approx.): 10,000 units x 1.9856 (gbp/usd rate) = position value of £19,856. that sounds more reasonable. thanks.

[rhodytrader]

Oanda's example is based on a USD denominated account. In order to determine USD position value and USD margin requirements you need to convert all positions to USD. That's what the EUR/USD example did.

If you are trading GBP in a GBP demominated account, then no conversion is necessary. If you are trading 10,000 GBP/JPY, then your position value is 10,000 GBP and your margin requirement is 2% x 10,000 = 200GBP.

[ukvipersden]

Originally Posted by rhodytrader

Oanda's example is based on a USD denominated account. In order to determine USD position value and USD margin requirements you need to convert all positions to USD. That's what the EUR/USD example did.

If you are trading GBP in a GBP demominated account, then no conversion is necessary. If you are trading 10,000 GBP/JPY, then your position value is 10,000 GBP and your margin requirement is 2% x 10,000 = 200GBP.

thanks. sorry, perhaps the info i provided actually made matters worse, sorry about that. so, you mean i don't even have to multiply my position size by gbp/usd??

[rhodytrader]

Not if your account is denominated in GBP.

[ukvipersden]

denominated? yes, i will be adding my initial monies in GBP and the currency i trade with will be GBP (pounds/sterling). is this correct? thanks. sorry to be a pain. it's just that i don't want to open an account and have immediate margin call payments to make if the position size/margin required is too large.