Let's take a look at what an Interbank trade looks like.  Suppose you decide that the Deutsche mark (D-mark) is undervalued against the U.S. dollar and want to buy 125,000 D-marks against the dollar.  You call your broker and he informs you that the current exchange rate for D-marks against dollars is 1.8348.  You go ahead with your plan and buy 125,000 D-marks against the dollar at 1.8348.  Let's first calculate what your margin requirement will be. (Margin requirements are between 1% and 3% of the dollar value leveraged.)

      1.  The first step is to divide 125,000 (D-marks) against the exchange rate of 1.8348

• (125,000 divided by 1.8348 = $68,127.31 / In other words, 125,000 D-marks is currently worth $68,127.31 dollars.)

      2.  The next step is to multiply the $68,127.31 by 3% to figure out your margin                      requirement.

• ($68,127.31 multiplied by 3% = $2,043.81 / So your margin requirement for this trade is $2,043.81)

Let's now suppose that it's several weeks later and your prediction that the Deutsche mark would appreciate against the dollar was correct.  Now it will only cost you 1.7699 D-marks to buy a dollar as opposed to the 1.8348 D-marks it cost you just a few weeks ago.  

Let's calculate your profit.

PURCHASE:

1.  125,000 D-marks divided by the exchange rate of 1.8348 = $68,127.31

SALE:

2.  125,000 D-marks divided by the exchange rate of 1.7699 = $70,625.45

• (In other words, the D-marks you bought a few weeks ago that were worth   $68,127.31 are now worth $70,625.45. This gives you a profit of $2,498.14.)

             3.  $70,625.45 minus $68,127.31 = $2,498.14 profit.

This formula applies to all Interbank currencies except the British pound, the Australian dollar and the Irish punt.  In those two currencies you simply multiply by the exchange rate instead of dividing by it.  The reason is that those two currencies are quoted as dollars per foreign currency (remember?) as opposed to foreign currencies per dollar. It's also worth noting that Interbank rates and futures rates will rarely work out to the exact same price because of the different delivery periods involved.  Much like different contract months in the futures markets are typically different from one another in price. It's because of the differing delivery dates. 

The information contained here was gathered from sources deemed reliable, however, no claim is made as to its accuracy or content.  There is a risk of loss in trading and investing and you should carefully consider your financial position before making any trades.

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