What exactly happens in a sell during a currency trade?
assuming the firm I am using isn’t just using its own clients against eachother…can you explain to me how this situation would work.
I have $100,000 USD sitting in my pocket right now. I think that the EUR/USD price is going to go from .8 to .95. In other words I believe that the value of the dollar will rise against that of the euro, which could also be said that the value of the euro will decrease to that of the dollar. Pretty much what i’m saying is the dollar is going to look better than the euro. But I’m already holding onto 100K USD, how am i going to make money from such a situation? If i convert to eur today, it will give me 80K. I am speculating that in a few days my 100K converted to EUR is going to give me 95K. So how can I benefit from this speculation? What exactly needs to be done, what trade with whom?
Thanks
May 24th, 2010 at 2:46 am
In your example, it only works if you had euros, rather than dollars to begin with. Look:
1) buy euros: $100 * 0.8 gets you €80
2) wait for the dollar to rise to 0.95
3) your €80 are now only worth $84,21
So you lose 16 bucks AND transaction fees.
There are ways to speculate and make a buck if the dollar rises, but the transaction fees will usually be greater. It’s one of those unfair situations where only the financial institutions win.