Example of Foreign Exchange Margin Trading Transaction
15th September: You buy a USD / JPY contract (buy US dollars and sell Japanese yen) of USD500,000 at the exchange rate of 105.00, anticipating the USD to gain against the JPY.
| You Buy | USD500,000 |
|---|---|
| You Sell | JPY52,500,000 |
| @ FX Rate | USD/JPY 105.00 |
| Settlement Date | 17th September |
By 20th September: The USD has rallied to JPY106.00, as anticipated. You will make a profit by selling your USD and buying back JPY.
| You Sell | USD500,000 |
|---|---|
| You Buy | JPY53,000,000 |
| @ FX Rate | USD/JPY 106.00 |
| Settlement Date | 22nd September |
| Profit from the deal is JPY (53,000,000 - 52,500,000) |
JPY500,000 |
|---|---|
| JPY500,000/106.00 | |
| USD4,716.98 |
Next, let us calculate the net interest earned from the deal:
| Interest Rate | Debit | Credit |
|---|---|---|
| USD | 1.01% | 0.01% |
| JPY | 1.01% | 0.01% |
| Interest earned from buying USD from 17th Sept to 22nd Sept |
= USD500,000 X 0.01% X 5/360 |
|---|---|
| = USD0.69 | |
| Interest paid for selling JPY from 17th Sept to 22nd Sept |
= JPY52,500,000 X 1.01% X 5/360 |
| = JPY7,365 | |
| = USD(7,365/106.00) | |
| = USD69.48 | |
| Net interest earned from the deal for the five days |
= USD0.69 - USD69.48 |
| = - USD68.79 |
Finally, let us calculate the interest earned from your margin deposit, assuming you have exactly USD50,000 at the time of account opening,
| Interest earned from your margin deposit for the five days |
= USD50,000 X 0.01% X 5/360 |
|---|---|
| = USD0.07 |
Total Return:
| To conclude, total return | = USD4,716.98 - USD68.79 + USD0.07 |
|---|---|
| = USD4,648.26 |
On the contrary, trading losses will be incurred if you had done the reverse of the above-mentioned example, i.e. you sold USD / JPY at 105.00 and bought back at 106.00 to limit your losses when the pair rallied.
