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  Forum  Discussions  Currency Tradin...  trading question on CAD
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New Post 8/22/2009 3:45 PM
  cad_trader
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trading question on CAD 

Suppose USD/CAD= 1.0961 and I buy a 10,000 lot, which costs $100 in margin. Let's for the sake of simplicity, consider that there are no spreads in this trade. When the pair raises 10 pips, USD/CAD= 1.0971, I'd want to sell to capture $10 profit. Theoretically, the cost of SELL, should be $110 credited to my account, is that right? I am selling $10971 now, but at the same time I am buying CAD, so I still have to pay 100$ for the transaction?

 
New Post 8/22/2009 6:18 PM
  admin
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Re: trading question on CAD 
Modified By admin  on 8/22/2009 5:20:39 PM)
If you buy a 10,000 lot of USD/CAD, you're buying 10,000 USD and financing that trade by selling an equal dollar amount of CAD.
 
If the exchange rate is 1.0961, that means you must sell 10,961 CAD, which is worth 10,000 USD. You are now long USD and short CAD.
 
If the exchange rate rises, the CAD is getting cheaper relative to the dollar. Therefore, you can buy back your short position for less money than you paid and gain a profit.
 
For instance if the exchange rate rises to 1.0971, you could buy back the short 10,961 CAD position. It will cost 10,961/1.0971 = 9,990.88. You'll pay for the trade from the 10,000 long USD in the account thus leaving you with $10,000 - $9,990.88 = $9.11 profit.
 
The reason it's not a $10 even profit is because you're dealing with a variable pip pair. The USD is on the left side of the currency pair. That means the pip value changes each time the exchange rate changes.
 
The reason is that the quote is in terms of CAD and you're trying to convert them to USD. For that, we need to know the exchange rate. In other words, a quote of 1.0971 tells us how many CAD are necessary to buy one USD. As that quote changes, so does the pip value.
 
Notice when the quote was 1.0961, the pip value is 0.9123, which means you're gaining about 91 cents per pip. Because the quote rose 10 pips, you should have a profit of about $9.10

Hope this helps!

Bill 

 

 
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