Wednesday, January 30, 2013

Pips, Lots, leverage and margins


A currency exchange rate is composed of two elements: first integer which is the number before the decimal point, and second base points or pips, which are the figures after the decimal point. The exchange rates are given to four decimal places, with the last decimal being 1/100 of 1 percent. The smallest fluctuation can suffer an exchange rate is one pip base. If, for example, buy 1 million pounds to the dollar to 1.3050, each change of a pip is 1,000,000 x 0.0001 = $ 100. The only exception to this rule applies to the Japanese Yen, which is quoted with only two decimals (USD / JPY 98.40).

The forex investment instruments such as options, futures and commodities, are priced contract or lot. For example, the contract of sterling in the currency futures markets have a standard price of 62,500 pounds. To buy or sell 2 million pounds with a hedging strategy, you would have to buy 32 lots or contracts (62,500 x 32 = 2,000,000) to cover the risk. To find the price of individual contracts in the exchange markets, you can visit the website of the Chicago Mercantile Exchange.

Leverage is to invest in foreign exchange you using borrowed funds to an agent, is Forex, futures, or options. Currency traders offer leverage of 1:100 or 1:200, and 1:400 even offer some agents. With a leverage of 1:100, you can perform an operation (buy or sell a currency) to 100 times greater than the balance of the trading account you have with your agent. The balance you have in your investment account called margin, and will always require an agent, with a leverage of 1:100, you have in your account a margin of at least 1% of the total amount of your outstanding transactions. If you are losing money on the transaction and your equity has dropped below the margin requirement, you must refill your account or close the transaction agent.

Margin requirements in futures and options are usually higher, typically between 5 and 20% of the value of the transaction. As with Forex margins, the value of outstanding transactions is calculated consistently against market prices, and if the balance in the investment account falls below the margin requirement, the account should be recharged or agent operations closed .

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