Currency Future Example

✏️ Suppose that you sell the Korean Won future at .00073 Dollars(USD) per Won. Over the course of the week, the futures price drops from $.0007300 to $.0006800. What will be your P/L as of the end of the week? The contract unit is 125,000,000 Korean won.

✔ Selling the contract is a bet that the price will fall. The price did indeed fall. It fell from $.0007300 to $.0006800. Therefore, you should make money. ΔPrice = NewPrice - OldPrice = $.0007300 - $.0006800 = $.0000500 P/L = ΔPrice × Contract Unit = $.0000500 ×125,000,000 = $ 6,250

✏️ That’s a lot of money to gain. What was your leverage on this trade at the start? Assume the initial margin is $5,000.

✔ Leverage is always “the amount of assets that that you are betting on”/“your initial investment”.

To calculate the amount of currency you are betting on, we calculate the initial contract size using the initial futures value (at the start). Contract value = Contract unit × futures price = 125,000,000 × $.00073 = $91,250

Your initial investment is the initial margin.

Leverage = $91,250 / $5,000 = 18.25 to 1

✏️ What is the percent profit/loss on your initial investment?

✔ We invested $5,000 and we gained $ 6,250. As a percentage of our initial investment, we had a 125% profit: $ 6,250 / $5,000 × 100 = 125% profit

What is the percent increase or decrease in the futures price? $.0007300 to $.0006800 ( $.0006800 - $.0007300 )/$.0007300 × 100 = -6.849315068%

✏️ Suppose, instead, that the currency rose instead of fell. In particular, suppose that it rose from $.0007300 to $.0007500. What would your P/L be? Would you get a margin call? If you did, how much money would you need to add?

✔ ΔPrice = new - old = $.0007500 - $.0007300 = $.00002 The value of a Won rose by $.00002. You had bet it would fall, so you’ll lose money. P/L = - $.00002 × 125,000,000 = $-2,500

The new amount of money in your margin account would be: initial amount + P/L = $5,000 - $2,500 = $2,500 This is below the maintenance margin, so you you will get a margin call.

Whenever you get a margin call, you always have to put in exactly enough money in order to raise the total amount of money in the account up to the initial margin. Therefore, you’ll have to fill the account back up to $5,000 by adding back in the $2,500 that you lost.

✏️ The gain of $0.00002 was more than enough to cause a margin call. What is the exact amount of a gain that would cause a margin call?

✔ Your margin account started with $5,000 in it, and you will get a margin call if the margin account drops to the maintenance margin of $3,400. That’s a loss of $5000-$3400=$1600.

To figure out what sort of a price change that would be, we just use our standard profit and loss equation for when we sell a future P/L = - ΔPrice × Contract Unit

We then plug our numbers in, recalling that a loss of $1600 means that P/L=-$1600
-$1600 = - ΔPrice × 125,000,000

Next we do some algebra: ΔPrice = -$1600 / -125,000,000 = $0.0000128

Whenever you use a plug-and-chug approach like we’ve done here, it can be helpful to go back and check your math using the basic equations. Let’s do that. All we need to do is check to see if this change in price would actually cause the margin call. So let’s see how much money we would lose and then check to see if it causes a margin call.

P/L = - ΔPrice × Contract Unit = - $0.0000128 × 125,000,000 = - $1,600

If our margin account started with $5,000 in it and we lost $1,600, then we would finish with: $5,000 - $1,600 = $3,400 Sure enough, this is exactly our maintenance margin.