With a US$5,000 balance in your margin account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise. The current bid/ask price for USD/CHF is 1.6322/1.6327 (meaning you can buy $1 US for 1.2627 Swiss Francs or sell $1 US for 1.2622) Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 126,270 Swiss Francs. At 100:1 leverage, your initial margin deposit for this trade is $1,000. Your account balance is now $4000. As you expected, USD/CHF rises to 1.2735/40. You can now sell $1 US for 1.2735 Francs or buy $1 US for 1.2740 Francs. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit. You close out the position, selling one lot (selling 100,000 US dollar and receiving 127,350 CHF) Since you originally sold (paid) 126,270 CHF, your profit is 1080 CHF. To calculate your P&L in terms of US dollars, simply divide 1080 by the current USD/CHF rate of 1.2735. Your profit on this trade is $848.05 SUMMARY Initial Investment: | $1000 | | Profit: | $848.05 | | Return on investment: | 84.8% |
If you had executed this trade without using leverage, your return on investment would be less than 1%. |