Tuesday, November 3, 2009

4.3.7 Forex Calculus : Calculating Profit and Loss - Scenario 6

Non-USD Cross Rates (Base/USD) In the previous example,
the USD was the base currency in the conversion pair (USD/JPY).
Now USD is the quote currency of the conversion pair (GBP/USD).
So, in this case we want to buy 20000 units of EUR/GBP.
The entry price is 0.6754 and the exit price is 0.6772.
So, the price change is 0.0018.
The Conversion Rate now is the current price of the
GBP/USD pair. The reversal of the role of the U.S. Dollar in
the conversion pair (GBP/USD) requires another change
 in the profit formula:
Profit in USD = Price Change x Units Traded x Rate
$19.05 = 0.0018 x 20000 x 1.8902

Remember that when USD is the quote currency of the
conversion pair, you must multiply the rate. If USD is the base
currency of the conversion pair, then divide the rate.
You may have noticed there was no mention of transaction 
costs in the  six scenarios given. The broker always subtracts 
the transaction cost at the moment the trade is initiated; 
therefore transaction costs do not affect the above calculations.

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