Thread: Basic questions about buying and selling currency pairs

Hi, I have two questions:

1. - I constantly read that when you buy eur/usd, you buy the base currency and in precisely the same time you sell the quote currency. Well I would like to understand why. I mean, picture I start an account with a broker at euros and that I deposit 100 euros, I then choose to start a position buying 100 euros. According to the theory I am selling 136 dollars, but I didn't have any dollar in my account. Where are those dollars coming from? I didn't have them, just how can it be possible that I sell something that I don't own?

2. - And now, if the exchange rate moved to 1.50 and that I sell my open position in eur/usd, What might happen? According to the theory when you sell eur/usd you're selling euros and buying dollars, but I started my account with 100 euros and now I am getting 150 dollars rather than Do I want to change the dollars I get in the sell into euros?

Thanks!

Originally Posted by ;

Hello, I have two questions: 1. - I constantly read that if you buy eur/usd, you buy the base currency and in the exact same time you market the quote currency. Well I would love to understand why. I mean, imagine I open an account with a broker at euros and that I deposit 100 euros, I then choose to open a situation buying 100 euros. According to the theory I am selling 136 dollars, however I didn't have some dollar in my account. Where are those dollars coming from? I didn't have them, just how can it be possible that I sell something that I do not own? 2. - And now, if the...

Do not over-complie trading by trying to determine what's happening with each currency deposits on your account.

When the chart you are taking a look at looks like it is going lower on your view, then short it. If looks higher, buy it. You do not have to know anything else unless you are a fundamental trader.

Numbnuts which is reasonable, thanks!!!!

Srt yes, I was reading a novel on covered interest rate arbitrage, and it was somewhat perplexing.

Let's state our pair is the aud/usd, imagine that you are from Australia and also your interest rates for holding Aussie dollars is 1%. Imagine that the interest rate for USD dollar is 5%. Let's say these are the interest rates for 90 days.

0. - I really don't know that. It's assumed that you receive/pay a particular interest rate if you lend/borrow, and I assume that's if I go to the bank and that I make a deposit for a particular amount of time. But at the spot market, in my broker platform, should I lend, what is the interest rate? How can I know that amount? Are those interest rates distinct to the interest rates we had been referring to with my charge on the bank. I mean, in my trading platform that the interest rates are employed for a particular amount of time or maybe not?

I know if I go to a bank and make a deposit that the interest they'll pay will be larger the longer time that I lend the money, it is a function of time. However, I really don't know where the interest comes out of currency pairs, I really don't now how they are associated with time. I am able to start a position for 1 day or for three months, I really don't specify that if I start it.

Let's continue with the example:

Should I hold dollars I get 5%, but should I borrow aud that I have to return 1%, so I am expected to earn a 4 percent.

Picture I borrow 100 aud dollars to buy 100 usd dollars, and the exchange rate is 1:1, one aussie dollar is equivalent to one american dollar. (Just to make this easy)

that I need to reunite 101 aussie dollars.

To cover in the exchange rate risk I can utilize a forward for a particular date. If I would know where the interest rates in the currency pairs come from, and if they employ it'd be more clear. I know I will need to take a peek at the forward rates to know if I could earn some cash or not with this particular operation.

Originally Posted by ;

Numbnuts that makes sense, thanks!!!! Srt yes, I had been studying a novel on covered interest rate arbitrage, and it was a bit confusing. Let us say our pair is your aud/usd, imagine that you're out of Australia and also your interest rates for holding Aussie dollars is 1%. Imagine the interest rate for USD dollar is 5%. Let us say those are the interest rates for 90 days. 0. - I don't know that. It's assumed that you receive/pay a specific interest rate if you lend/borrow, and I presume that is if I go to the bank and I make a deposit to get a specific...

Again, I presume you're getting way too complied unless you're holding for a lengthier time period.
Swaps (curiosity paid/received) is usually not a large difference with most popular pairs. If you're holding for longer periods of time(swing trading) then you would like to calculate the swap costs/benefits. As an example, right now you will receive interest if you buy NZDUSD so you will have to pay interest if you brief NZDUSD. Shorting 1 lot of NZDUSD currently will probably cost $8.87 each 24 hours. Most brokers will have a calculator that will give you the prices for each pair. Oanda has one you can use (http://fxtrade.oanda.com/analysis/interest-calculator).

Well it is not me, I would like to know how people with a lot of money think. If they invest a few lots they could earn a decent quantity of money. Interest rate parity is among those theories to comprehend exchange rate dynamics. I really don't know this too complex thing.

According to this calculator all of the pairs that I tried had the same interest rate. Is that common? Or is it just the site is not functioning correctly at the moment?

Originally Posted by ;

Well it's not me, I wish to understand how people with a lot of cash believe. If they invest several lots they can earn a fair quantity of money. Interest rate parity is one of those theories to understand exchange rate dynamics. I don't understand this overly complex matter. In accore with that calculator all the pairs I tried had the exact same interest rate. Is that common? Or is it the site is not functioning properly at the present time?

You need to change from Balance to Trade with the calculator.

Thanks srt.

This makes more sense.

Originally Posted by ;

This movie is not available; can you check, please?

You do not need to hold a currency to short (sell) it, and it doesn't really make much difference which currency your account is denominated in. Should you market AUD/USD, you are basically 'borrowing' Australian dollars and temporarily converting those borrowed aussie dollars into US dollars, in the hope USD will rise or AUD will drop, at which time you convert that money back into AUD and flatten the position making a profit. The euros you deposited into your account is similar to collateral for this trade, just if it goes against you.