Forex Spread Betting
A spreadbetting account allows traders to buy and sell foreign exchange contracts either intraday or over a longer term period, so you can hold positions for just a few minutes to weeks or even years.
Minimum stakes amongst the providers typically range from 50p or £1 a point and the spreads just 2 ticks on the main spot rates and 10 to 12 on the equivalent forward contracts. Margin requirements are about 1 to 2% of the total exposure (or typically 40 to 100 times the stake). The tick size is usually 0.0001 so if a pound is worth $1.6345 the quote would be 16345. Providers say foreign exchange betting tends to revolve around four currencies: sterling, the dollar, the euro and the yen.
Spot FX or Rolling Bets
For shorter-term positions it can be better to use a spot currency bet. These follow spot foreign exchange trading in the interbank markets and close at 8pm UK time and settle at the prevailing spot rate, although it is possible to rollover them over into the next day at a small additional cost. Rolling bets are usually suitable for short-term trades of up to 3 weeks or less.
Forward FX
Forward FX bets are suitable for taking longer-term positions of up to 6 months. In the underlying markets, a forward currency is an agreement of a rate today at which currencies will be exchanged on an agreed date in the future. The Forward FX bets are very similar, except rather than exchanging currencies, bets are simply expired based on the spot rate at 8pm London time on the expiry date of the contract. With a quarterly forex spread bet you don’t incur the daily financing charge (unlike the daily rolling) although the spread will be a little wider. At any point in time the forward rate will reflect the current spot rate and the effect of the interest rate differential between the two countries over the remaining time to expiry. For example interest rates in the USA are currently lower than those in the United Kingdom so the GBP/USD forward rate will be a little less than the prevailing spot rate to make up for the loss of yield through holding the money in dollars.
For example, let’s say the spot rate of GBP/USD is 19910/19922. Someone who thought that sterling would continue to strengthen against the dollar over the next three months could buy a forward FX bet on the sterling/dollar rate at 19922 for $2 a point. This bet would be the equivalent of buying £20,000/selling $39,844 in the foreign exchange market and would require an initial margin deposit of just $600. Should sterling appreciate against the dollar and the quote move to 19980/19992, the position could be closed at 19980 for a profit of 58 points or $116.
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