T2W Trading Community

4. Worked examples

4.1 Down-bet to expiry

EUR/USD is currently trading at 1.6000/05. You think that USD will strengthen against EUR.

• The bookmaker’s spread for spot EUR.USD is 1.59/61, which is wider than the market spread
• You place a down bet on December EUR/USD at £5 per point. Since we are operating to 4 decimal places, this amount to £500 for every 1c movement in the exchange rate. Assume that the NTR is 200 times the stake. Initial margin is therefore:-
  
  200 X £5 = £1,000
  


• You turn out to be right and EUR/USD falls to a settlement 1.5855 at expiry. Your gain is: -
  
  (1.5900 – 1.5855) X £5 per point = 45 points X £5 = £225, representing a return on margin of 22.5%

4.2 Up-bet to expiry

You expect the euro to strengthen against the US dollar so you place an up bet of EUR/USD for expiry in December.

• The bookmaker is quoting 1.59/61
• You place an up bet for December EUR.USB at £3 per point
• Your margin is 200 X £3 = £600
• EUR/USD settles at 1.6215. Your profit is:-
  (1.6215 – 1.61) X £3 per point = £345 on margin of £600, a return of 57.5%

4.3 Closing out pre-expiry

The EUR/USD futures contract on the International Money Market is trading at 1.6000/05. You feel that the euro is going to rise over the next 3 months.

• You place an up spread bet in March EUR/USD futures quoted at 1.59/61, at £10 per point
• As the NTR factor is 200, your initial margin is 200 X £10 = £2,000
• EUR/USD falls to 1.5850/55 and the bookmaker is quoting 1.5750/60.
• On paper, you are losing :-
  

  
  (1.6005 –1.5750) X £10 per point = 150 points X £10 = £2,550
• Your margin account is now down to - £500 and you receive a margin call for £2,500
• The EUR/GBP futures contract strengthens to 1.5900/05 and the bookmaker is quoting 1.5800/1.5905. You decide to cut your losses and close out your bet. You lose:-
  (1.6005 – 1.5800) X £10 per point = £1,500
• You now have no more open positions, so you can withdraw the remaining £500 from your account and put it on a horse.

5. Spread-betting as entry point to forex

Spread betting has been tipped as the ideal entry point to the trading of forex, a relatively new area for the private investor made feasible by the internet.

There are several features of spread betting that are attractive to the first-time forex investor, principally: -

• The low minimum transaction size
• The absence of overheads (3-monitor trading stations, proprietary software et al.) with spread-betting websites providing live market data
• CGT-free gains, giving a clear advantage over CFDs
• The low volatility of the “big four” major currency pairings, and the impossibility of a global bear market in forex