GLOSSARY

Base Currency: The numerator of the traded pair.

Terms Currency (quote price): The denominator of the pair to which the price of the pair is quoted.

Buy (long): In the forex market long means that you buy the base currency and at the same time you sell the terms currency.

Sell (short): In the forex market short means that you sell the base currency and at the same time you buy the terms currency.

Bid: The best (highest) price which is offered by the buyers.

Ask: The best (lowest) price which is offered by the sellers.

Lot size: Measures the amount of the trade and refers to the base currency. This amount is standardized to 100,000 (1 standard lot), 10,000 (1 mini lot) or 1,000 (1 micro lot). When you trade a currency pair, the amount that you trade refers to the base currency, so if you sell 100,000 EUR/USD, you practically sell 100,000 EUR, and if you buy 100,000 EUR/USD, you buy 100,000 EUR. This amount (100,000) is called face value or nominal value.

Pip: A pip is the smallest price increment in forex trading. Most currencies are traded to four decimal points, so that a pip is 0.0001 or 1/100 of a cent. The exception to the four decimal points is the Japanese Yen which is normally traded to two decimal points.

Pip Value: To express the value in the terms currency, multiply 1 pip with the lot size.

·         EURUSD pip = 0.0001 X 100,000 = $10.00 (for standard lots)
EURUSD pip = 0.0001 X 10,000 = $1.00 (for mini lots)

To convert to the base currency divide by the exchange rate:

Say EURUSD exchange rate = 1.4750, then $10.00 / 1.4750 = 6.78€

·         GBP / JPY pip = 0.01 X 100,000 = 1000 ¥ (for standard lots)

 

To convert to an account’s currency (e.g. USD) divide by the exchange rate $/¥:

If $/¥ = 82.12 then 1000 ¥ / 82.12 = 12.17$

 

.  Tip: In order to convert to an account’s currency divide by the pair which has as numerator the currency of the account and as denominator the same as the traded pair.

Profit Loss Calculation: P/L (long) = [lots size * (close price – open price) * conversion rate] / close price

P/L (short) = [lots size * (open price – close price) * conversion rate] / close price

Conversion rate: Is the rate which converts the results of the trade (Profit / Loss) into the account’s currency e.g. suppose that we hold an account in USD and that we entered in a long British Pound position against the Japanese Yen at 130.423 and that the position has closed at 130.957. The traded amount is 5mil or 50 lots and the GBP/USD rate at the time of closing is 1.58465 (this is the conversion rate which allows the transition to our account’s currency, taking into account any triangle arbitrage opportunities).

P/L = [5mil*(130.957 – 130.423)*1.58465] / 130.957 = $32,308.43

Margin Requirement: The minimum amount which is escrowed in order to open a position. Margin depends on the account’s leverage. E.g. If the leverage is 1:100 then you are able to trade a position a hundred times larger than the escrow amount.

Leverage: Determines the percentage of a trade’s nominal value that is required as margin.

Swap (Rollover fees): In order to avoid any riskless profit related to the embedded compensation from the interest rates difference of the two involved currencies, an amount must be credited or debited according to short term interest rates.

Swap = [lot size * (Buy rate – sell rate)] / (365*price)

For example, assume that an investor owns 10,000 CAD/USD. The current exchange rate is 0.9155, the short-term interest rate on the Canadian dollar (the base currency) is 4.25% and the short-term interest rate on the U.S. dollar (the quoted currency) is 3.5%. In this case, the rollover interest is $22.44 [{10,000 x (4.25% - 3.5%)} / (365 x 0.9155)].

This is the general simple compound formula that has been used for rollover calculation.

So, if the currency bought has a higher short term interest rate (e.g. LIBOR) than the currency sold, then the respective amount will be credited to the investment account.

A triple storage is charged /added for the passing of a position from Wednesday into Thursday. This is because a position opened on Wednesday has Friday as a value date. So, when a position is passed from Wednesday into Thursday, the value date is moved not by 1, but by 3 days and becomes Monday.

The rollover amount (USD per std lot) appears on a daily basis at the AAAFx website. This amount will either be credited or debited, for each currency pair, depending on the position (buy / sell).

Margin call: When the equity of an account reaches or falls below the level of margin requirement.

Stop out: The situation in which all open positions in an account are closed by the broker because the equity reaches a pre-specified level of margin requirement. In AAAFx this level is the 70% of the margin requirement. E.g. if the margin requirement is 1,000$ and the equity of the account is 700$ then all of the open positions will be closed automatically.

CFDs

 

P/L Calculation (long): [(close price – open price)*contract size*lots]/conversion rate

.  Example 1: buy 5 lots JPN225 open at 10615, close at 10960. Account’s currency is USD and the conversion rate is $/¥ = 82.9.

P/L = [(10960-10615)*100¥*5]/82.9 = 2080.8$

.  Example 2: Buy 10 lots USoil. Open at 96.05 closes at 96.62. Account’s currency USD

P/L = [(96.62 – 96.05)*100b*10]/1$ = 570$

Margin Calculation: (lots* contract size*price*margin) / conversion rate

.  Example: The necessary margin for the example 2 is:

Margin = (5*100¥*10615*0.06) / 82.9 = 3841$

·         In general the contract size or multiplier gives meaning to the underlying product (index, commodity)

·         The multiplier of indices converts points into money

·         The multiplier in commodities determines the quantity of the underlying product

Rollover: Applied to all of the CFD symbols except Oil, NGAS and Bund. Rollover depends on 3 months LIBOR.

·         e.g. Client is long 10 US 30

·         The current roll (Buy) is -$0,88

·         The client will be assessed a charge of $8.80 (-$0.88 * 10) for the particular trading day.

Index positions will incur a 3 day rollover on Friday (22:00 GMT)

Metal positions will incur a 3 day rollover on Wednesday (21:00 GMT)

Expiration dates: Oil and Natural Gas have a monthly expiration (please see the table below). Open positions will be closed at bid/offer at 22:15 GMT. The only consequence of this is that clients will realize any floating P/L at the time the position is closed. There are no rollovers for any oil contracts offered. Also all pending stop and limit orders that are associated with the expiring contract will be cancelled.

 

 

Treasury products have a quarterly expiration (please see the table below). Clients that hold an open position on the Expiration Date will be closed at our bid/offer at 21:00 GMT for BUND, the only consequence of this is the client will realize any floating P/L at the time it is closed. There are no rollovers for all Treasury contracts offered.

 

Copper is the only metal to have a once every other month expiration.