An investor opens a foreign exchange trading account with her broker by depositing $5,000. The broker allows 50:1 leverage (or equivalently, 2% margin). The investor plans to sell 200,000 Australian dollars and buy U.S. dollars. The exchange rate is AUDUSD 0.7861. (One pip is one basis point.)
a. If the AUDUSD increases by 1 pip, calculate the investor’s profit/loss in U.S. dollars.
b. If the AUDUSD decreases by 1 pip, calculate the investor’s profit/loss in U.S. dollars.
c. If AUDUSD changes to 0.8, 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 AUDUSD changes to 0.7, 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.