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Desk jockeys at major banks used to be the only ones to enjoy the thrills and spills of trading the foreign exchange market, but no longer. Retail traders are taking up the sport in droves using a range of different products to punt on the direction of currencies – as we outline below.

Margin Forex

In margin forex, the investor takes a leveraged position on a currency, and the margin forex provider is on the other side of the transaction. The margin forex provider offsets that position in the over-the-counter (OTC), or inter-bank forex market, and makes its money on a portion of the spread that’s embedded in the price. The investor needs to have sufficient margin in their account to cover the amount at risk.

Say the $A is trading at 94.5 cents, and an investor believes it will rise higher, and wants to participate in that move as if he had US$100,000. The investor requires A$1000 to create that position: he buys the A$ and sells the US$. For every point that the market moves in his favour, he makes the equivalent of US$10. But a guaranteed stop-loss is created at 94 cents, so the most the investor can lose on this trade is US$500. The minimum trade size (on EasyForex) is a position that covers US$2500, which requires A$25 in margin.

Margin Forex is offered by EasyForex, CityIndex, IG Markets, GFT CFDs, CNC Markets and BrokerOne.

Contracts for Difference (CFDs)

A foreign exchange CFD represents a theoretical order to buy or sell a certain amount of currency. Your profit or loss is determined by the difference between your opening price and the price at which you close your position.

The price of a CFD is derived from the spread – the highest buying price (offer) and lowest selling price (bid) – that is quoted on the $A/$US exchange rate by the issuer. Someone expecting the $A to rise against the $US would buy at that quote: someone expecting the $A to fall would sell.

To enter the minimum transaction of $A10,000 a client must lodge a deposit of 2 per cent of the $US amount. At this minimum the profits or losses are $US1 for each point (one-hundredth of a US cent) the $A rises. Gains (and losses) are magnified as the contract size (the amount of currency ‘bought’ or ‘sold’) rises.

In both, an investor must have margin in his account to cover the possibility of the position moving against them: if not, the position is closed out. Accounts may be maintained in $US (or whichever currency is being traded), or in $A.

With the A$ trading at 94.7 US cents, say the CFD issuer quotes a two-point price at 9473-9475, meaning sell at 94.73, buy at 94.75.

A bullish client buys one standard contract at 94.75, for A$100,000, expecting the A$ to rise against the US$. To open this position, the client must deposit 2 per cent of the value of the trade, that is, A$2,000. The standard contract is US$10 a point (one-hundredth of a cent), meaning that the trader’s profit (or loss) will be ten times the difference in the opening and closing price.

Say it’s a week later, and the new quote is 9600-9602, and the trader decides to close the position and take a profit, by ‘selling’ one lot at 9600. The trader makes 125 points (9600 – 9475), or US$1250, in profit.

A bearish investor would ‘sell’ one contract at 94.73. Say the A$ falls and the customer buys the contract back at 93 even. He makes 173 points, or US$1730 of profit.

IG Markets’ mini-contract is even simpler: it controls A$10,000 of currency, and rises or falls by US$1 a point.

Currency CFDs are offered by over-the-counter CFD providers CityIndex, IG Markets, CMC Markets, GFT CFDs, First Prudential Markets and BrokerOne. The ASX offers exchange-traded CFDs over the A$/US$ exchange rate, the A$/NZ$, A$/€, A$/¥, NZ$/¥, NZ$/US$, €/US$ and US$/¥.

Binary CFDs

CFD provider IG Markets offers ‘binary’ currency CFDs based on whether a particular currency rises or falls against another currency today: a ‘day’ closes at 8pm UK time (7am in Australia). IG Markets quotes a price, between zero and 100, on the probability of the currency rising. If the currency rises, the trade settles at 100: if it falls, the binary settles at zero.

The minimum trade size is one contract. If the investor is trading the A$ against the US$, the minimum bet size is US$10 a point. If the investor buys when the binary price is at 50 – when the A$ is priced at a 50:50 chance of rising or falling that day against the US$ – and the binary closes at 100, the investor makes US$10 a point, or US$500. But the investor must have the maximum loss, US$500, in their account before making the trade.

Spread betting

In spread betting, the issuer, IG Markets, acts as a financial bookmaker, offering a spread on which speculators can bet on the direction of the $A. IG Markets quotes a bid and an offer on the exchange rate: if you expect the $A to rise, you “buy” at the offer price; if bearish on the A$, you ‘sell’ at the bid price.

Say an investor is bullish on the A$: he makes an ‘up-bet’ by ‘buying’ the currency at the sell quote and chooses to bet A$10 a point. (The required deposit for this transaction is the stake of A$10 multiplied by IG Index’s prevailing ‘deposit factor’ for that bet.) If the A$ rises by ten points, the investor makes A$100. If it goes down 10 points he loses A$100.

Currency warrants

Currency warrants issued over the $A/$US exchange rate are traded on the Australian Securities Exchange (ASX). These represent the right to buy or sell $A10 at a fixed value in terms of $US – the “strike price” – on or before a set date. Call warrants allow the holder to buy and put warrants allow the holder to sell.

An investor bullish on the $A against the $US can trade this view by buying a call warrant; an investor expecting the $A to fall would buy a put warrant.

Currency warrants are a leveraged security, meaning that the warrant price will move to a greater degree than the movement in the exchange rate itself: thus, movements in the exchange rate can magnify both profits and losses. But there are no margin calls, and the maximum loss is limited to the initial investment amount. Macquarie Bank issues currency warrants on a three-month rotation.

An investor buying the AXUWMF warrant on the ASX gains the right to buy the A$ at 90 US cents – for 59.5 cents. Buying the AXUWMY warrant gives you right to sell the A$ at 93 cents. Each warrant controls A$10. For every 10-point (a point is one-hundredth of a cent) move in the currency, the warrant will move in price by a full cent.

Currency warrants on the ASX

ASX Code

Issuer

Call/Put

Strike Price (US cents)

Bid price (Aust. cents)

Offer price (Aust. cents)

Expiry date

AXUWMME

Macquarie Bank

Call

100.00

13

14

26 Jun 08

AXUWMI

Macquarie Bank

Call

100.00

26.5

27.5

25 Sep 08

AXUWMH

Macquarie Bank

Call

96.00

26

27

26 Jun 08

AXUWMX

Macquarie Bank

Put

96.00

47.5

48.5

26 Jun 08

AXUWMY

Macquarie Bank

Put

93.00

30.5

31.5

26 Jun 08

AXUWMF

Macquarie Bank

Call

90.00

59

60

26 Jun 08

AXUWMZ

Macquarie Bank

Put

90.00

17.5

18.5

26 Jun 08

AXUWMV

Macquarie Bank

Put

88.00

32.5

33.5

25 Sep 08

AXUWMG

Macquarie Bank

Call

85.00

98

99

26 Jun 08

AXUWMW

Macquarie Bank

Put

85.00

5.4

6.4

26 Jun 08