FX Margin trading
What is FX margin trading?
FX Margin trading is a strategy that allows traders to enter into positions larger than their account balance through credit extended by the counterparty, such as a broker
The margin is the collateral that a firm must exchange to cover the credit risk posed when trading certain FX derivatives, such as FX forwards.
The main reason firms may conduct margin trading is to take advantage of leverage.
Advantages of FX margin trading
- Ability to capitalise on leverage
- Increase the notional mount that can be traded.
Disadvantages of FX margin trading
- Potential to of incur significant loss (PnL), creating significant liquidity challenge over the short period of time
- It may impose a cash-drag due to the need to maintain liquidity to cover the margin calls arising from the leveraged position
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