Calculating Interest on forex trade

One ofthe best things about Forex trading is the fact that one can trade using leverage, thus
borrowing as much as 1,000 times your capital in order to make a trade. However, borrowing
money for trading in foreign exchange is the same as borrowing it for other purposes—interest
must be paid on the loan.
However, as currency trading involves both buying and selling, the interest due on your loan can
be offset by the interest earned on the currency you buy. Before going on to particular examples,
let us take a look at interest rates in general, to see how the foreign exchange market is affected
by it.
In central banks, interest rates are set in accordance with a country’s monetary poIicy—high
interest rates make the currency more expensive to buy and lower interest rates make it less so.
imagining the government ofa country with high inflation will help you understand how interest
rates are used.
The government, because of rapidly rising prices, might decide to raise interest rates. This would
increase the cost ofthe country’s currency, and make demand and consumption fall, as
borrowing would be more expensive.
This in turn would cause prices to fall and inflation rates would come down. Similarly, a country
undergoing recession might lower interest rates to boost the country’s economy, as lower price of
currency would cause demand, and, therefore, supply, to increase.
Interest rates set by central banks also determine at what rate commercial banks can borrow from
governments and lend to their customers, including forex traders. Which tells us how interest
rates affect this trade.
A trader who, for example buys GBP/USD, needs to borrow the Dollars to buy the Pounds and
will, thus, pay interest on the USD and earn it on the GBP. If the interest rate the Bank of England
sets for the UK Pound is higher than the one set by the Federal Reserve for the US Dollar, the
trader will earn more on the UK Pounds he bought than he pays on the US Dollars he borrowed,
thus making a profit.