It is now possible to bet on most major currencies through spread betting broker here, from USD/GBP to EUR / PLN (Polish Zloty).
What Am I Buying When I Buy For Instance, USD/JPY?
Always take the first three letters and look at the price in that respect i.e. in the case above if you buy, it is the as buying dollars, which is the same as shorting Yen. If you did the opposite, short USD /JPY it is the same as shorting dollars or buying Yen.
Something to consider before you decide to go ahead with currency spread betting is these are probably the fastest moving and require the least deposit requirements (pro rata to volatility) to all the markets. The GBP/USD can move 200-300 points a day, and regularly moves 100 points yet requires in many cases just an 80 point deposit. Therefore, in currencies most particularly, calculate how much you can afford to lose.
Buying a Currency
As with most other markets you have a choice to either buy a future or spot (daily) rate, a future you pay no interest as it is calculated in the spread, but a spot you pay daily which differs per provider. If you wish to invest for more than 1-2 weeks it will be considerably cheaper in most cases to purchase a future. However, the price will be considerably different for futures in some markets to spots.
Let’s assume you are looking at the GBP/USD, the prices at the time of writing are 16024-16027. If you want to sell or short, it is the same as buying dollars or shorting pounds, hence you would short at 16024 at let’s say £4 p/point. Your equivalent investment level is 4*16024 = £64096
How Do You Calculate Your Deposit Requirement?
This should be somewhere on the deal slip, however if your curious how it’s calculated, here it is:
Spread betting companies either state a percentage deposit e.g. 1%, though most specify a point deposit, e.g. 160 points.
To calculate the percentage requirements, in this case take your level of equivalent investment (see above, £64096), and calculate it at 1% = £641.
In the case of a point deposit requirement, this is simpler, simply the points, say in this case 160*amount per point (£4) = £640.
Bear in mind if the price rises you will need to increase your deposit so that including your net losses there is always £640 in the account, otherwise they may close your position.
Assume in a weeks time the price has risen to 16050-16053.
What is Your Profit?
The spread betting company will have calculated this for you automatically, however it is 16024 (the price you shorted at a week ago) – 16053 (the current buy price) = -29 points. Your loss is -29 * £4 (amount p/point) = -£116.
Assume in a weeks time the price has fallen to 16000-16003.
What is Your Profit?
In this case it is 16024 (the price you shorted at a week ago) – 16003 (the current buy price) = 21 points. Your profit is 21 * £4 (amount p/point) = £84.
What’s your gain?
If you have read this already as it is repeated in the ‘How to bet on Shares’ etc please jump a few paragraphs.
As you bet on a margin (deposit), your percentage return is significantly higher than if you bet using cash, however, so too are your losses. In the first case your return on investment is -116/£640 (your deposit) = -18%, as against using the full £64096 investment, in which case your return is -116/64096 = <1%. In case 2 it is 13% and <1%, hence a significant difference.
Why Are Futures Often Considerably Different To Cash Prices In Some Currencies More Than Others?
If for instance you look at the AUD/USD June contact at the time of writing it is 9863-9878, whilst the daily bet is 10016-10020. This is a significant difference and suggests a sure profit by selling the Australian dollar spot and buying the future. However, there is a reason for this discrepancy, the reason is simple and is known in economic terms as interest rate parity. The simple explanation is there is a difference in interest rates between the US and Australia, in the US it is less than 0.25%, whilst in Australia it is 4.75%. That is an interest rate differential of 4.5%.
The obvious answer is you can make a profit by converting dollars into Australian Dollars, put the cash in a bank and buy a forward to lock in at the current currency rate for a few months time, making a profit. However, because of this reason the exchange rates differ for forwards. There is actually a currency-based trading strategy on this approach, which will be looked at later.