02/12/2010 00:05:10
forum
Administrator
Posts: 387
|
Margin Requirements
The following information is based on the new CFTC 50:1 leverage requirements that will come into effect on October 17, 2010. Prior to that, we can continue to offer 100:1 to leverage.Margin leverage is 50:1
The margin requirement on a $100,000 contract is 2%
$100,000 is equivalent to 10 lots
Account value must be above $100 to open a new Forex position.
USD based pairs (USD/JPY)$100,000 has a $2,000 margin requirement.
Non USD based pairs (EUR/USD)Current price x 2%
The base currency price (EUR) is 1.2928, giving it a $2585.60 margin
Non USD related pairs (EUR/JPY)If the pair does not contain USD, you must refer back to USD. Example: EUR/JPY would refer to EUR/USD (because it starts with EUR). So a $100,000 lot would have a margin requirement of $2585.60
If the equity in an account falls below the required margin, then all open trades will be closed at the prevailing market rate.
|
01/12/2010 22:26:50
forum
Administrator
Posts: 387
|
Leverage and MarginMost forex brokers allow a very high leverage ratio, or, to put it differently, have very low margin requirements. This is why profits and losses can be so great in forex trading even though the actual prices of the currencies themselves do not change all that much—certainly not like stocks. Stocks can double or triple in price, or fall to zero; currency never does. Because currency prices do not vary substantially, much lower margin requirements is less risky than it would be for stocks.
Most brokers allow a 100:1 leverage, or 1% margin. This means that you can buy or sell $100,000 worth of currency while maintaining $1,000 in your account. Mini-accounts can have leverage ratios as high as 200.
The margin in a forex account is often referred to as a performance bond, the amount of equity needed to ensure that you can cover your losses. Thus, you do not buy currency with borrowed money, and no interest is charged on the rest of the currency’s value that is not covered by margin. So if you buy $100,000 worth of currency, you are not depositing $1,000 and borrowing $99,000 for the purchase. The $1,000 is to cover your losses. Thus, buying or selling short currency is like buying or selling short futures rather than stocks.
The margin requirement can be met not only with money, but also with profitable open positions. The equity in your account is the total amount of cash and the amount of unrealized profits in your open positions minus the losses in your open positions.
Total Equity = Cash + Open Position Profits - Open Position Losses
Your total equity determines how much margin you have left, and if you have open positions, total equity will vary continuously as market prices change. Thus, it is never wise to use 100% of your margin for trades—otherwise, you may be subject to a margin call. In most cases, however, the broker will simply close out your largest money-losing positions until the required margin has been restored.
Most brokers advertise leverage ratios, which are usually 100:1 for regular accounts and could go as high as 200:1 for some mini-accounts. Or, often, only the leverage is quoted, since the denominator of the leverage ratio is always 1. The amount of leverage that the broker allows determines the amount of margin that you must maintain. Leverage is inversely proportional to margin, which can be summarized by the following 2 formulas:
Margin = 1/Leverage
Example: A 100:1 leverage ratio yields a margin percentage of 1/100 = 0.01 = 1%. A 200:1 ratio yields 1/200 = 0.005 = 0.5%.
Leverage = 1/Margin = 100/Margin Percentage
Example: If the margin is 0.01, then the margin percentage is 1%, and leverage = 1/0.01 = 100/1 = 100.
To calculate the amount of margin used, multiply the size of the trade by the margin percentage. Subtracting the margin used for all trades from the remaining equity in your account yields the amount of margin that you have left.
To calculate the margin for a given trade:
Margin Requirement = Current Price x Units Traded x Margin
Example—Calculating Margin Requirements for a Trade and the Remaining Account EquityYou want to buy 100,000 Euros (EUR) with a current price of 1.35 USD, and your broker requires a 1% margin.
Required Margin = 100,000 x 1.35 x 0.01 = $1,350.00 USD.
Before this purchase, you had $2,000 in your account. How many more Euros could you buy?
Remaining Equity = $2,000 - $1,350 = $650
Since your leverage is 100, you can buy an additional $65,000 ($650 x 100) worth of Euros:
65,000 / 1.35 ≈ 48,148 EUR
To verify, note that if you had used all of your margin in your initial purchase, then, since $2,000 gives you $200,000 of buying power:
Total Euros Purchased with $200,000 USD = 200,000 / 1.35 = 148,148 EUR
|