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My question is around the base currency and what bearing, if any, this has on the to the initial currency you invest when opening a trading account.

For example, I live in the UK so I open an account with a broker with £10k GBP of capital. It's clear to me how I can then trade on say GBP/USD where I am buying USD with my initially invested GBP.

How does this work in the case I want to trade EUR/USD? Or, if I decide to open a short position with a GBP/USD pair (buying GBP with USD)?

Thanks

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    Does your broker helping you trade currencies directly (are you really buying USD?) or is your broker helping you get FX exposure by trading FX Futures/Forwards?
    – rhaskett
    Jul 6, 2015 at 20:06

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You have a couple options:

  • Borrow the currency you want to sell, and pledge your GBP as collateral. Then there will probably be an exchange of interest based on the GBP rate versus the currency your are borrowing, as well as margin calls if the FX rate of the borrowed currency vs GBP drops substantially
  • Trade a forward contract, collateralized by your GBP. Similar economics to the above, but with the term of the forward added in
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    "Buy the currency that you want to sell"? At that point, OP is long the currency. After selling, OP has no position. That's not how to short a currency.
    – JTP - Apologise to Monica ♦
    Jul 6, 2015 at 17:15
  • Good point, I'll remove it
    – Yosef Weiner
    Jul 6, 2015 at 17:17
  • Couldn't figure out how to delete the whole answer so I removed that line
    – Yosef Weiner
    Jul 6, 2015 at 17:20
  • Thanks for the information. I am still trying to understand how this would physically play out on a trading platform. Do forex traders typically have multiple accounts for each base currency when trading multiple pairs, or one account and this happens in the background (presumably you are made aware of any additional costs). Thanks again
    – CatsLoveJazz
    Jul 7, 2015 at 11:01

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