Now that you know how forex is traded, it’s time to learn how to calculate your profits and losses. When you close out a trade, take the price (exchange rate) when selling the base currency and subtract the price when buying the base currency, then multiply the difference by the transaction size. That will give you your profit or loss.
Price (exchange rate) when selling the base currency – price when buying the base currency X transaction size = profit or loss
Let’s look at an example
Assume you buy Euros at $1.2178 per Euro and sell Euros at $1.2188 per Euro. The transaction size is 100,000 Euros. To calculate your profit or loss, you take the selling price of $1.2188, subtract the buying price of $1.2178 and multiply the difference by the transaction size of 100,000.
($1.2188 – 1.2178) X 100,000 = $100
In this example, you would have a $100 profit from this transaction.
Let’s try it again using a different currency
Assume you buy British pounds at $1.8384 and sell them at $1.8389. The transaction size is 10,000. What is your profit or loss?
When you think you know the answer, advance to the next screen.
By following the formula we discussed earlier, you should be able to determine that you would see a $5.00 gain from this transaction.
($1.8389 – $1.8384) X 10,000 = $5.00
Now you try it.
If you sell 100,000 Euros at $1.2170 per Euro and buy 100,000 Euros at 1.2180 per Euro, would you have a profit or loss on the transaction and how much would it be?
Take the selling price of $1.2170 and subtract the buying price of $1.2180 and then multiply the difference by 100,000.
($1.2170 – $1.2180) X 100,000 = –$100
If you calculated a loss of $100, you calculated correctly.
You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought 100,000 Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50.
($1.2173 – $1.2178) X 100,000 = –$50
Similarly, if you sold 100,000 Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.
($1.2170 – $1.2165) X 100,000 = $50
If the quote currency is not in US dollars, you will have to convert the profit or loss to US dollars at the dealer’s rate.
Let’s look at an example using a USD/JPY spread. If you lost 50,000 Japanese yen on the transaction and the dealer’s rate is $.0091 for each yen, what is your loss in dollars? By multiplying the transaction size (50,000) by the dealer’s rate ($.0091), you will find that your loss is $455.
50,000 X $.0091 = $455
Remember that you must also subtract any dealer commissions or other fees from your profits or add them to your losses to determine your true profits and losses. Also, remember that the dealer makes money from the spread. If you immediately liquidate your position using the same spread, you will automatically lose money.
Quiz 2
Q: A speculator believes that the Swiss Franc will appreciate against the US Dollar and enters into a forex transaction when the USD/CHF spread is 1.2584/1.2586. In this situation, what will the speculator do?
A. Sell US dollars and buy Swiss francs at 1.2586
B. Sell US dollars and buy Swiss francs at 1.2584
C. Sell Swiss francs and buy US dollars at 1.2586
D. Sell Swiss francs and buy US dollars at 1.2584
A: The correct answer is B.
In this case, the speculator needs to buy Swiss Francs and sell US Dollars. That eliminates C and D as possible answers. In order to identify the correct answer, it is helpful to review the concept of the bid/ask spread. When you sell dollars to a dealer, the dealer wants to buy the currency at the bid price. In this case, when you sell dollars to the dealer, you will receive only 1.2584 Swiss francs for every dollar you sell.
Q: If a speculator buys a EUR/USD spread when the spread is 1.1020/24 and immediately sells it back to the dealer at the same spread, what will be the end result?
A. 4 point gain
B. 4 point loss
C. No gain or loss
D. There is not enough information in the problem to answer the question.
A: The correct answer is B.
Q: When the dealer quotes a spread, the dealer is seeking to buy at the low price and sell at the high price. If a speculator enters this spread, she will have bought the currency at 110.24 and when she sells the currency back, she will have sold it for 110.20, giving her an immediate four point loss. A speculator with $500,000 wants to buy Canadian dollars when the spread is 1.1957/62. The position is offset when the spread is 1.1862/66. What will be the result?
A. US $5,000 gain
B. US $5,000 loss
C. US $3,834 gain
D. US $3,834 loss
A: The correct answer is C.
In this case, our speculator sold US dollars and received Canadian dollars. As a result, the speculator received 1.1957 Canadian dollars for each US dollar (the bid price, or the price at which the dealer would be willing to sell Canadian dollars for US dollars). The speculator received 597,850 Canadian dollars (1.1957 X 500,000). Subsequently, the value of the US dollar depreciated against the Canadian dollar. The speculator bought 500,000 US dollars and sold Canadian dollars for 1.1866 (the dealer ask price) and paid 593,300 Canadian dollars. The speculator still had 4,550 Canadian dollars, which represents his profit. However, before you can answer the question, you must convert Canadian dollars into US dollars.
To solve this problem, you need to find out how many US dollars it takes to buy 4,550 Canadian dollars. When the speculator reversed the long Canadian dollar position, it took him 1.1866 Canadian dollars to buy one US dollar; so to find his profit, the speculator can simply divide the Canadian dollar profit (Canadian 4,550) by 1.1866 Canadian dollars per US dollar. The result is $3,834 US dollars.
