Pre-school Quiz, Question 5

Beginner Questions
1

I’m having a brain fart understanding the math for question 5. It would appear to be the most basic equation, but apparently I am off. The question asks if you buy $100,000 USD worth of EUR at 1.28 and it goes up to 1.282, how much have you made?

I understand that the price has gone up .2 % so the it says the answer is $200 (100,000 * .002)

But with my logic:
I buy $100,000 USD worth of EUR at 1.28 per EUR - that’s:
100,000 / 1.28 = 78,125 EUR

I then sell my EUR and get 1.282 USD for each EUR - that’s
78,125 x 1.282 = 100,156.25

To me, that seems to be a profit of $156.25 USD. What am I missing?

2

1.28 to 1.282 is 20 pips and on 100,000 each pip is worth $10 so 20pips times $10 is $200

but I have to admit, the rest of that math has me confused too.

edit:
ok so 1.28/1.282 = .99843993 subtract 1 from that to get percent =.00156 times 100,000 = $156

yep, I’m confused too

edit again:
ok so 1.282 - 1.28 = .002 times 100,000 = $200
hmm…

guess I’m not much help.
Think I’ll stick to relativity its easier
e=mc^2/(sqrt(1-v^2/c^2)

3

Your first mistake is that the price didn’t go up .2%. 20 pips and .2% aren’t the same, unless the beginning price happens to be 1.0000. .2% of 1.2800 is actually 25.6 pips. :slight_smile:

But that’s not what’s causing your error…

Your math is correct, but you’re leaving off the last step. Your profit is not 156.25 USD, it’s 156.25 [B]Euros[/B]. If you multiply the 156.25 Euros times the currect exchange rate you’ll get your $200 (156.25 x 1.282 = 200.31). :slight_smile:

4

ahh thanks for clearing that up, I was confused by that to! I knew something was missing, just couldn’t figure out what.

5

Right, duh!

I’m still confused. Didn’t I convert the EUR to USD by multiplying it at the exchange rate?

I then sell my EUR and get 1.282 USD for each 1 EUR - that’s
78,125 x 1.282 = 100,156.25

I must be thinking about this in a fundamentally wrong way. For example, I buy $100,000 of shares in stock A at $1.28 each. I now own 78,125 shares. I then sell each share for $1.282. I now have $100,156.25.

6

You needed to convert back to USD because while your math was correct, your thought process of the transaction was off because you confused your currencies. I was only looking at the numbers the first time and didn’t notice you said you bought 100,000 USD.

That’s not right, you cannot go long on EUR/USD and be buying USD. When you buy EUR/USD you are buying Euros, not USD. 1 lot on that pairs equals 100,000 EUR.

When you make that trade you go through 3 steps:

  1. Borrow enough USD from your broker to buy 100,000 EUR.
  2. Wait for the exchange rate to rise, then exchange your EUR for USD.
  3. Pay back the borrowed USD, and keep the rest for profit.

If you do the math like that you will not have to do the extra conversion step.

In your example you…

  1. Borrowed 128,000 USD and converted it into 100,000 EUR.
  2. Converted those 100,000 EUR into 128,200 USD when the exchange rate went up.
  3. Paid the USD back to your broker, leaving you with $200.
7

Ok - now that makes sense. So what I found misleading was that the question says “You buy 1 $100,000 lot of EUR/USD at 1.28”. Shouldn’t it say “You buy 1 €100,000 lot of EUR/USD at 1.28” ?

8

Yeah, it should say that. :slight_smile:

Everyone around here, including me, has a bad habit of always saying “dollars” when we mean “base currency.” It looks like Babypip’s has that bad habit too. :slight_smile:

9

good to know! haha, i wish i could just use my euros here in america all the time! lol.