The Price of Holding a Position

When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic

Posted in Traders' Delusions, Submitted by Trading Critic on Fri, 2006-09-22 00:10.
When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic

When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic. If you trade with options and similarly with warrants, there is time decay to consider. With CFD's as well as forex contracts, the price of holding a position is much simpler than dealing with delta's that define decay with derivative instruments such as options.

In this example we shall look at trading one standard forex contract across the AUD/USD (Australian and US dollar) currency pair (with the base currency set for Australian dollar) of AUD$100,000. In this case study, we will go long on the position – meaning that we are bullish for the currency pair. The amount of US dollars you can buy with AUD$100,000 is determined by the current price of the forex pair.

The AUD/USD dollar stands at 75 cents, and you determine from your own analysis that there is a prospect that the dollar will rise to 75.30 cents which means that when you trade long your one standard forex contract you will be able to buy AUD$100,000 (or sell US$75,000) and you are looking to sell your position at 75.30 cents which equates to a US$300 profit (Sell AUD$100,000 to Buy US$75,300). Even though you are trading on margin, your dealer would naturally see charge you the cost of borrowing that AUD$100,000 per day. The current Australian interest rate stands at 6% and the forex dealer or stockbroker usually adds a 1.5 percent to 2 percent premium on top of that. So you may be liable for 8 percent per annum interest rate for your position and usually your broker will collect the interest charge daily. The calculation is as follows: $100,000 @ 8% per annum / 365 days = 21.9178 = AUD$22 a day (about 2 pips) per contract

Your dynamic BEP (Break Even Point) if you have a take profit target of 10 pips, would be around 5 days. This is because after 5 days you will be liable for about AUD$110 in interest charges. If your target is 30 pips, then your break even point if 15 days, or about AUD$330.

Trading is not all about buying low (or selling high) and selling high (or buying low). If that sentence didn't make sense to you, the above article must have been harder to comprehend! With trading, you must consider your operating costs, mainly account keeping fees, commissions (fixed costs) and interest (variable cost): the price of holding a position.

Post new comment

*
*
The content of this field is kept private and will not be shown publicly.

*

  • Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd> <blockquote> <b> <h3>
  • Lines and paragraphs break automatically.