Forex basic - Swap

Market swaps are used to roll over open positions overnight in the Forex markets. They can be either positive or negative depending on the difference between interest rates. The sum, credited/debited as pay for rolling over a position is called Storage. The final swap amount is dependent on many factors, such as current interest rates in different countries, movement of the pair under scrutiny, forward market conditions, dealers expectations and swap-points of the broker's counteragent. We provide a theoretical basis for market swap calculations below.

Suppose that the interest rate of the European Central Bank (ECB) is 4.25%, and the FED interest rate is 3.5% per annum. Let's assume that you have a short position (Sell) on EURUSD per 1.0 lot. Respectively, you sell 100,000 EUR. In other words, you borrow them at a rate of 4.25%. By selling the Euro, you buy US Dollars, which are deposited at a rate of 3.5%. If the interest rate of the country whose currency you bought (USD – 3.5%) is more than the interest rate of the country whose currency you sold (EUR – 4.25%), the swap will be credited to the trading account in the deposit currency, otherwise it will be debited. It is also worth mentioning that swap also includes the broker's commission for rollover.

In total, your cost for this transaction is 1% per annum (the difference between the interest rates "InterestRateDifferential" = 4.25% - 3.5% = 0.75%), plus the broker's commission for transferring your position to the next day (0.25%). It is then necessary to convert the swap value, expressed per annum, into the deposit currency.

Example 1. Rollover of Short positions (Sell) in the Forex market:

If you buy a currency with a lower interest rate (USD – 3.5%) than the one you sell (EUR – 4.25%), the swap will be debited from the trading account.

Let's consider the formula:

SWAP = (Contract * (InterestRateDifferential + Markup) / 100) * Рrice / DaysPerYear, where

Contract = 100,000 EUR (1 lot)

Рrice = 1.3500 – current market price of the currency pair (EURUSD)

InterestRateDifferential = 0.75% – the difference between the countries' interest rates

Markup = 0.25% – broker's commission

DaysPerYear = 365 – number of days in a year

Calculation:

1. SWAP = (100 000 * (0.75 + 0.25) / 100) * 1.3500 / 365 = 3.70 USD

This means that when the open short position on EURUSD is transferred to the next day, 3.70 USD will be debited from your trading account for each lot.

Forex basic - Margin

The deposit given to the broker by the trader is known as a MARGIN. Margins are required in order to use leverage. A broker demands this margin so that the opened position is maintained and sustained. The amount of margin demanded varies from broker to broker. A trader will offer the collateral in order to ensure and guard that his broker is not under threat of any credit risk.

Before calculating the margin requirements to open a position, you must consider the type of the trading account on which the transaction is made.

Margin – This is the amount of money that is currently being used to hold your positions open and is calculated as such: Rate*Volume traded/leverage.

e.g: If you trade 1 standard lot of EURUSD (let’s assume the rate to be 1.4300) and your account has a base currency of USD and you use a leverage of 1:500, then the margin used will be: 1.4300*100,000/500= $286.

Margin=rate per diposit cur*contract size/leverage

Margin Level – This is calculated by the formula of Equity/Margin. If you have a standard account and your Margin level falls at or below 20% then your position will be closed. For Micro accounts this level is at 5%.

Free Margin – This is your current Equity minus your Margin.  It is in effect the money you have   available to open new positions.

Margin – the collateral

Base currency – the first currency in the currency pair, for example:

EURUSD – the base currency is EUR

USDJPY – the base currency is USD

GBPJPY – the base currency is GBP

Contract – the contract size in the base currency. The size of 1 lot is always 100,000 units of the base currency. Respectively, 0.1 lot = 100,000 * 0.1 = 10,000 units of the base currency, and 0.01 lot = 100,000 * 0.01 = 1,000 units of the base currency

Leverage – leverage, for example:

leverage 1:500 – 500

leverage 1:100 – 100

After calculating the margin in the base currency, you must convert it into the deposit currency (at the rate when the position is opened), e.g. USD, EUR.

Margin Calculation on a pamm.mt4 account

Margin calculation on a pamm.mt4 account with USD as the deposit currency:

Trading Instrument (Currency Pair) – EURUSD;

Base Currency – EUR;

Lot = 0.1

Contract = 10,000 EUR (100,000 * 0.1 lot)

Leverage = 1:100 (100)

EURUSD Rate at Position Opening = 1.3540

Deposit Currency – USD

Calculation:

Margin = Contract / Leverage = 10,000 EUR / 100 = 100 EUR

2. We then convert the margin into the deposit currency (USD). If USD is the first currency in the pair under consideration, the margin should be divided by the rate; otherwise multiplied:

Margin= 100 EUR * 1.3540 = 135.40 USD

Margin equals 135.40 USD

Forex basic - Profit/Loss

Now let’s consider calculating profit/loss.

The formula is as follows: [(Close Price-Open Price)*contract size*lots}

For a Buy position: 

Profit/Loss = (Contract * ClosePrice) - (Contract * OpenPrice)

For a Sell position: 

Profit/Loss = (Contract * OpenPrice) - (Contract * ClosePrice), where:

Profit/Loss – profit/loss in the quote currency

Contract – the contract size in the base currency

ClosePrice – the closing price of the currency pair

OpenPrice – the opening price of the currency pair

Example 2: Calculating profit/loss for a Sell position in EURGBP on a trading account with USD as the deposit currency:

Lot = 0.19;

Trading Instrument (Currency Pair) – EURGBP

OpenPrice EURGBP = 0.6983

ClosePrice EURGBP = 0.6883 (100 pips = 0.6983 - 0.6883 = 0.0100)

Contract = 19,000 EUR

GBPUSD Rate = 2.0256 (necessary for converting the profit/loss into the deposit currency)

Calculation:

1. Profit/Loss = (19,000 * 0.6983) - (19,000 * 0.6883) = 13,267.7 – 13,077.7 = 190 GBP

2. Now we convert the profit/loss into USD. If USD is the first currency in the pair under consideration, the profit/loss should be divided by the rate, otherwise it should be multiplied:

Profit/Loss = 190 GBP * 2.0256 = 384.86 USD

Profit/loss for Gold (spot), Share СFDs, Futures and other currency pairs is calculated in the same way.

Forex basic - PIP

For Forex instruments with five places shown after the decimal point (0.00001) and with three places after the decimal point (0.001), the value of one pip is equal to the change in the fourth (0.0001) and second (0.01) place after the decimal point, respectively.

Let’s calculate the value of one pip for example 1.43 lot on the currency pair GBPCHF. Suppose that we open a Buy position of 1.43 lot at 2.35330 and close the opened position at 2.35340 (1 pip = 2.35340 - 2.35330 = 0.00010).

Let’s consider the formula to calculate the value of one pip:

OnePipValue = (Contract * (Price + OnePip)) - (Contract * Price), where:

OnePipValue – the value of one pip in the quote currency

Contract – the contract size in the base currency

Price – the price of the currency pair

OnePip – the smallest price increment for a currency (one pip)

The quote currency is the second currency in the quotation, for example:

EURUSD – the quote currency is USD

GBPCHF – the quote currency is CHF

EURGBP – the quote currency is GBP

Example 1: Calculating the value of one pip in GBPCHF on a trading account with USD as the deposit currency:

Lot = 1.43;

Trading Instrument (Currency Pair) – GBPCHF;

GBPCHF Rate = 2.3533;

Contract = 143,000 GBP

USDCHF Rate = 1.1659 (necessary for converting the value of one pip into the deposit currency)

Calculation:

1. OnePipValue = (143,000 * (2.3533 + 0.0001)) - (143,000 * 2.3533) = 336,536.2 – 336,521.9 = 14.3 CHF

2. Now we convert the value of one pip into the deposit currency (USD). 

If USD is the first currency in the pair under consideration, the pip value should be divided by the rate, otherwise it should be multiplied:

OnePipValue = 14.3 CHF / 1.1659 = 12.27 USD

OnePipValue = 14.3 CHF / 1.1659 = 12.27 USD

The value of one pip in GBPCHF is equal to 12.27 USD.