An investor opens a foreign exchange trading account with her broker by depositing $10,000. The broker allows 100:1 leverage (or equivalently, 1% margin). The investor plans to sell 750,000 Swiss francs and buy U.S. dollars. The exchange rate is USDCHF 0.9511. (One pip is one basis point.)
a. If the USDCHF increases by 1 pip, calculate the investor’s profit/loss in U.S. dollars.
b. If the USDCHF decreases by 1 pip, calculate the investor’s profit/loss in U.S. dollars.
c. If USDCHF changes to 1, calculate the investor’s return and compare it to the return she would have had had she made this investment using only her own capital.
d. If USDCHF changes to 0.9, calculate the investor’s return and compare it to the return she would have had had she made this investment using only her own capital.
e. Calculate the number of pips that would wipe out the investor’s usable margin.