Forex Education: Margin Calculation for Cross-Currency Pairs



Guest post by FXOpen Forex Broker

Cross-currency pairs, simply known as “crosses,” are by far the most complex instrument when it comes to margin calculation. Even some experienced traders see it as a stumbling block in Forex trading.

The message “Not enough money,” commonly displayed in the MT4 platform, first confuses, then irritates and finally gets on nerves. Such an error is mainly triggered by insufficient margin requirements, needed to open a trade. To avoid these mistakes in the future, make use of the step-by-step procedure given below to calculate the margin for crosses.

This is the third and last article in the series. Here are the previous articles:

Cross-currency pairs:

  1. a.       (Base/USD – GBPCHF)

Let’s open a short position (Sell) of a 3-lot volume (Pic.1):

Forex Education Margin Calculation for Cross Currency Pairs Image 1

Margin for Sell/Buy positions is derived from the average price of the trading instrument, used to calculate the cross-rate margin (here GBPUSD) the moment the order is executed*:

Forex Education Margin Calculation for Cross Currency Pairs Formula 1

Where

                                             Volume – the volume of the given short position in lots;

Lot Size – the amount of the base currency per lot;

                                             Avrg Price1 – average Base/USD price at the moment of order execution =

(Base/USD Bid1 + Base/USD Ask1)/2;

  Leverage – credit help provided to the client.

Regarding our example, we come up with:

Forex Education Margin Calculation for Cross Currency Pairs Formula 2

We carry out similar margin calculation to open a 5-lot long position (Pic.2):

Forex Education Margin Calculation for Cross Currency Pairs Image 2

Forex Education Margin Calculation for Cross Currency Pairs Formula 3

Let’s move on with Hedged Margin calculation for locked positions.

To this end, a newly opened 3 lot Sell is added up with a 5 lot Buy (Pic.3):

Forex Education Margin Calculation for Cross Currency Pairs Image 3

The following steps are taken to calculate Hedged Margin:

i)                    WAP is derived from all the short (Sell) and long (Buy) positions, opened by a client:

Forex Education Margin Calculation for Cross Currency Pairs Formula 4

ii)                   Hedged Margin is calculated by the maximum sum of the Sell and Buy volumes and WAP:

Forex Education Margin Calculation for Cross Currency Pairs Formula 5

  1. b.      (USD/Base – CHFJPY)

Let’s open a short position (Sell) of a 3-lot volume:

Forex Education Margin Calculation for Cross Currency Pairs Image 4

Margin for Sell/Buy positions is derived from the average price of the trading instrument, used to calculate the cross-rate margin (here GBPUSD) the moment the order is executed*:

Forex Education Margin Calculation for Cross Currency Pairs Formula 6

Where

                                          Volume – the volume of the given short position in lots;

Lot Size – the amount of the base currency per lot;

                                           Avrg Price1 – average Base/USD price at the moment of order execution =

(Base/USD Bid1 + Base/USD Ask1)/2;

Leverage – credit help provided to the client.

With regard to our example, we have:

Forex Education Margin Calculation for Cross Currency Pairs Formula 7

We carry out similar margin calculation to open a 5-lot long position (Pic.5):

Forex Education Margin Calculation for Cross Currency Pairs Image 5

Forex Education Margin Calculation for Cross Currency Pairs Formula 8

We are finally getting to the calculation of Hedged Margin for locked positions: a newly opened 3 lot Sell is added up with a 5 lot Buy (Pic.6):

Forex Education Margin Calculation for Cross Currency Pairs Image 6

The following actions are required to calculate Hedged Margin:

Forex Education Margin Calculation for Cross Currency Pairs Formula 9

Important! High market volatility may trigger the difference in the exercise price with the price at the moment of the trading account verification for the compliance with Free Margin conditions.

The exercise price is used to calculate Margin for open positions.




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