Hi, I need to get some details regarding how margin/leverage works within a relationship with a Forex Dealer.
I have searched all over the web for a flow chart explanation but have not found anything. Actually, I haven�t found any info on the specifics of what I am looking for.
Here is what I’m looking for: I know how the leverage works but I want to understand the process behind the scenes:
For example: Assuming a 1% 100K non-segregated margin account with external execution (no dealing desk option) and a deposit of $20,000 then enter a 1 lot trade; I put up $1,000 and the Forex Dealer effectively �lends� me the additional $99,000. The trade I entered is a (carry) trade to BUY GBP/JPY (earning roll-over interest � which is based on the full $100,000). The Forex Dealer�s liquidity providing banks/partners take the other side of the trade.
Theoretically speaking; 6 months later, I have a floating loss of - $15,000 and have earned roll-over interest of $1,000. The Forex Dealer suddenly goes bankrupt (very unlikely � but we�re still talking theoretically here), and no-one steps in to buy them. All open positions are liquidated which means my negative $15,000 position is forced to become an actualized loss. I end up with (approximately) my initial margin of $1,000 + $5,000 left in equity + $1,000 in roll-over interest (already credited) = +/- $7,000.
A) Is this correct? And B) Can someone provide a flow chart of how this whole leverage & rollover interest providing relationship works between the three parties involved � Client, Forex dealer & External Execution Liquidity Providing Banks?
You have a vary intresting question here. As for A) I think you are wrong. If the dealer goes belly up then your balance is zero. When a company goes bankrupt then their assests are sold and the highest debit is paid first. So the chance of you getting 7k is slim to none. As for B) sorry cant help
First things, first, your margin deposit is not applied to the value of the trade in this way. It’s not like in stocks where you put up $X and borrow $Y from the broker to make a trade. In forex your margin is just a security deposit against losses. You still borrow the full transaction value (at least on the short side of the trade).
Theoretically speaking; 6 months later, I have a floating loss of - $15,000 and have earned roll-over interest of $1,000. The Forex Dealer suddenly goes bankrupt (very unlikely � but we�re still talking theoretically here), and no-one steps in to buy them. All open positions are liquidated which means my negative $15,000 position is forced to become an actualized loss. I end up with (approximately) my initial margin of $1,000 + $5,000 left in equity + $1,000 in roll-over interest (already credited) = +/- $7,000.
Your actual account balance would be $21,000 (initial deposit + interest earned). Your account equity would be $6,000 (balance - open trade loss).
Can someone provide a flow chart of how this whole leverage & rollover interest providing relationship works between the three parties involved � Client, Forex dealer & External Execution Liquidity Providing Banks?
Leverage is not directly applicable to the question of rollover/carry interest. It’s just a factor in the sizing of a position. Every trade follows this basic pattern:
Borrow the short currency of the pair and pay the overnight interest rate for that currency.
Convert the borrowed currency in to the long currency of the pair.
Deposit the long currency and receive overnight interest.
In the case of dealing desk brokers, they take the immediate other side of your trade (and look to offset it against another customer’s trade or in the market if need be). If you’re using an ECN, your broker is just providing a pass-through service.
I don’t know if that answers your question or not.