Forex Explained

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, GBP/USD is the price of the euro expressed in US dollars, as in 1 GBP = 1.50 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the GBP/USD price of 1.5238 a pip would be the '8' at the end. So the bid/ask quote of GBP/USD might be 1.5007/1.5009. The spread for a retail customer is wider because the volumes which are traded by retail customers are far smaller than those of wholesale customers. You the client are a retail client in accordance with MIFID classifications.

If the administrator buys an Forex position for the client with depot money in the clients ODL Securities account the following example could apply.

Example

The currency pair being traded is GBP vs USD. The market price is 1.45-1.55. As the GBP is the base currency this spread represents the buy price and the sell price USD against the GBP. The mid price is 1.50 which is half way between 1.45-1.55 so this means that 1 GBP is worth USD 1.50. If the administator believes that the value of the USD will increase he will buy the spread ie selling GBP and buying USD, so the trade exposure will start at 1.55. If the value of the USD increases then the price for the GBP vs USD forex pair will decrease. If the market price changes to 1.20-1.30 the administrator may the sell the clients position at 1.20 therefore the profit margin is 1.55-1.20 which eqauls 0.35

Margin

If the client position was put on with a 1-5 margin and Euro 2,000 was the initial margin taken from the clients depot then the total amount of exposure the client has to that trade would be 2,000 x 5 which equals GBP 10,000.

As per the above example, buying the GBP vs USD spread at 1.55 would mean the Euro 10,000 would be exchanged for USD 15,500.

When the administrator closes this position as in the exampls above, the USD 15,500 would be sold at 1.20 and exchange the USD 15,500 for GBP 12,919.66

This would produce a profit of GBP 2,919.66