FOREX Contract Specifications
Every FOREX contract has a number of specifications that outline the relevant details of the currencies represented in the contract. Many of these specifications are unique to the FOREX market and may be unfamiliar to new investors. However, the contract specifications are fairly straightforward, and new investors can gain a solid understanding of FOREX contracts with just a little study.
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Base & Quote Currency
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Every FOREX contract involves a currency pair. The first currency is the base currency, while the second is the quote currency. For example, in a EUR/USD contract, the euro is the base currency and the U.S. dollar is the quote currency. The current price of the contract is the value of the euro quoted in US dollars.
Size
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Each contract represents a fixed amount of the base currency. A standard contract represents 100,000 units. For example, standard contracts for the USD/GBP and USD/CHF each represent $100,000. There are also mini and micro lots representing 10,000 and 1,000 units of the base currency, respectively.
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Leverage
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Leverage is the difference between the size of the actual FOREX contract and the amount of margin you must have in order to trade that contract. Maximum allowable leverage varies by country, but some common leverage ratios in FOREX are 20:1, 50:1 and 100:1. For example, if you have an account allowing 50:1 leverage, you would need $2,000 of margin to trade a standard contract representing $100,000 worth of currency.
Spread
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The spread is the difference between the bid and ask price for any FOREX market. Many FOREX brokers profit from the spread in lieu of charging a commission on trades. The spread is generally quoted in pips and may widen or narrow in response to changing volatility. For example, a 2.5 pip spread on the EUR/USD means that the bid price is 2.5 pips lower than the ask price.
Rollover Rate
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The rollover rate is the amount of interest you stand to gain or lose should you hold a FOREX contract overnight. This amount may be positive or negative depending on the currency pair you are trading. For example, if you are long a market and the base currency has a higher interest rate than the quote currency, you will have a positive rollover rate. The rollover rate represents the interest differential on the full size of the contract being traded rather than the margin you use to trade the contract.
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References
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