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If the client is quoted a Forex, (foreign exchange) quote e.g. GBP/USD
"1.4550/60" then this represents the bid/offer spread for these two currencies. The rate of
1.4560 represents the rate at which the client can
Buy GBP against the US dollar. The rate of
1.4550 is the rate at which the client can
Sell GBP against US dollar. |
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If the client wishes to speculate on GBP/USD believing that the GBP will strengthen against the USD
(going long), then the client will buy an (X) number of lots of GBP (each lot being GBP
62500.00). This trade is called
(opening buy).
If GBP appreciates against the USD and the client wishes to close the position when the quote is |
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1.4675/1.4685,
then the client will sell
the lots of GBP or any number of them @
1.4675 (closing sell).
The profit/loss that results from this trade is calculated by subtracting the
purchase price
from the selling price
and multiplying it by the size of the trade
(profit/loss calculation). |
Selling price-Purchase Price x Size of Trade= Profit/Loss
1.4675-1.4560 x 62,500=USD 718.75 Profit
If the client wishes to speculate on GBP/USD believing that the British Pound will weaken against the US Dollar then the client needs to sell GBP (going short).
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If the quote is 1.4567/77 the client may decide to Sell 3 lots of GBP (3 x GBP 62500.00 @ 1.4567 (opening sell).
If the British Pound depreciates against the US Dollar and the client wishes to close the position when the quote is 1.4473/83, the client will decide to Buy 3 lots of British Pounds @ 1.4483. The resultant profit/loss is calculated as such: |
Sell Price-Purchase Price x Size of Trade = Profit/Loss
i.e. 1.4567-1.4483 x 3 x 62500.00 = USD 1,575 Profit
In the two examples above, if the currency in question moves in the opposite direction to the direction shown above, the profit on these trades becomes a loss.
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