I am new to forex. One thing I don’t understand is how money is moved back and forth between someones account when doing trading on foreign or cross pairs.
For example.
Suppose I have an account with my broker with $1000 USD in it.
I want to trade in the EUR/GBP pair at .75
According to the preschool
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency.
As I understand it. If I buy 10 Euro I do it by borrowing 7.5 British pounds.
So what happens when I close the position, how does that get translated back into USD to get deposited or withdrawn from my broker account when I close the position. Doesn’t the USD to either EUR or GBP exchange rate come into play somewhere. Is it the USD to (EUR or GBP, which one?) at the time I open the position or at the time I close the position.
What if the dollar drops with respect to either. How does that affect my account balance with respect to a margin call.
I can’t find a discussion of these technical details about how an account in USD works when USD is not either the base or quote currency.
Any help would be helpful.
In another post
Shorting GBPJPY means you are buying JPY with borrowed GBP
Longing GBPJPY means you are buying GBP with borrowed JPY.
Yes you are correct so once you close the position you will use the current rate of whatever cross currency you end up with and the USD price. To convert back to your account currency. Some brokers will make you give you the cross currency nf put that into your account then you have to manage that yourself or use the USD rate to exchange back
There are two points of secondary exchange rate consideration for a cross trade.
The first is the margin requirement. That’s based on the value of your position expressed in your account currency, so if you’re trading 1000 EUR/GBP your margin requirement will be 1000 x EUR/USD, which means it will fluctuate, but probably not by enough to be the difference between getting a margin call or not (unless maybe you’re right on the edge).
The second is your P/L, which is as you suggest. Your gain/loss is translated back into your account currency.
If I understand correctly. Its the Base currency to USD exchange rate that is used to calculate the amount moved to or from my brokerage account for both margin and position close calculations? And the margin calculation is dynamic in that it changes as the USD to Base currency exchange changes (although it may not be a big number) and when the position closes is the Base to USD exchange rate at closing that is used.
Just want to clarify that is the Base not Quote currency to USD exchange rate.
From the margin perspective I think the standard is to use the base currency because that’s what the number of units is based on.
In terms of the P&L of a position, however, it doesn’t matter which side you want to look at it because it’s triangular. If you’re trading EUR/GBP from a USD account, it doesn’t matter whether your profits are initially thought of in EUR or GBP terms because EUR gains converted to USD at EUR/USD are equal to GBP gains converted via GBP/USD because the EUR pip gains will be the GBP pip gains divided by EUR/GBP.
Thanks now its making sense. Now that you explain it, of course at closing it doesn’t matter which currency since the conversions rates are fixed at closing so you can go either way round the triangle. If it wasn’t there would be an arbitrage opportunity.
Just trying to see if my understanding is correct.
When I buy (long) a currency pair. I am buying the base currency and selling the quoted currency (by borrowing the quoted currency), but the number of units I am buying is calculated in the quoted currency. yes?
Suppose the USD/EUR exchange rate is 0.8, this means the EUR/USD exchange rate is 1.25 = 0.8/1.0
Suppose I buy 10000 pips USD/EUR, then I am actually selling 10000 pips worth of EUR and buying 12500 pips worth of USD.
Likewise if I buy 10000 pips EUR/USD, then I am actually selling 10000 pips worth of USD and buying 8000 pips worth of EUR. yes?
So then when I want to short a pair isn’t it the same as longing the reverse pair but with a different amount?
In other words, other than for the sake of convenience so that the transactions use the same units (pips in the quoted currency) one could when wanting to short a pair, just as easily long the reverse pair? Or is there something I am missing.
Specifically Shorting a pair for X units is the same as longing the reverse pair for Y units where Y = X times the exchange rate of the reverse pair.