To illustrate a typical FX trade, consider the following example.
The
current bid/ask price for USD/CHF is 1.6322/1.6327, meaning you can buy $1 US for
1.6327 Swiss Francs or sell $1 US for 1.6322.
Suppose you decide
that the US Dollar (USD) is undervalued against the Swiss Franc (CHF). To execute
this strategy, you would buy Dollars (simultaneously selling Francs), and then
wait for the exchange rate to rise.
So you make the trade: purchasing
US$100,000 and selling 163,270 Francs. (Remember, at 1% margin, your initial
margin deposit would be $1,000.)
As you expected, USD/CHF rises to
1.6435/40. You can now sell $1 US for 1.6435 Francs or buy $1 US for 1.6440 Francs.
Since
you're long dollars (and are short francs), you must now
sell dollars and buy back the francs to realize any profit.
You sell
US$100,000 at the current USD/CHF rate of 1.6435, and receive 164,350 CHF. Since
you originally sold (paid) 163,270 CHF, your profit is 1080 CHF.
To
calculate your P&L in terms of US dollars, simply divide 1080 by the current
USD/CHF rate of 1.6435.
Total profit = US $657.13
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