Question about FX agreement and carry trades

[marc_t]

Hi all,
I'm refering to the agreement made with companies such as 0anda, Refco etc. Basically most people here (on moneytec) carry out spot foreign exchange transactions.

My question is about the leverage and cost of lent funds. Say leverage is 50:1, you put up US$ 10,000 and thus control US$ 500,000. Am I correct to assume the broker puts up the US$ 490,000?

Thus the broker charges you for the interest differential from the US$.
Such as if the risk free rate is 4% and 6% annually in US and UK respectively, say you borrow US$ 490,000 from your broker and convert it to GBP, then your broker will give you 2% of the GBP equivalent of $US 490,000?

Inversely, say you borrow GBP 490,000 from your broker and convert it to US$, then your broker will charge you 2% of the US$ equivalent of GBP 490,000?

thanks
marc

[mishak]

Hello marc_t

Basically most people here (on moneytec) carry out spot foreign exchange transactions

I doubt it very much

Am I correct to assume the broker puts up the US$ 490,000

Broker lend/borrow money for the total open position only if you hold the position overnight.
Assuming GBP/USD price is 1.91, so you can buy approximately 260,000 GBP for 0.5M USD. You will pay/collect 2% annually on 0.5M USD = $27 per night. Spread will be $78 (min) - $130, so you need to hold open position for at least 3 nights/4 days - 1 week to break even.
If you keep open position you are subject to the currency risk. In case GBP/USD goes not in your direction you position will be closed by your broker with a loss of $5000 (depending on broker)

[marc_t]

thanks mishak