Hello: Lets assume you have a 10K USD account at IB and you want to buy a Japanese stock at 200,000 yen. Assume USD/JPY at 107. I could do this two ways: Method #1: Buy 200,000Y and then buy the stock. So now: Cash USD: $8131, Yen Stock: 200,000Y. If over next year USD/Yen rallies to 120 and I sell my stock for BE, I will have lost vis-a-vis: Sell stock at 200,000Y, convert back to USD and get $1667, add back to my $8131 and get $9798 so I lost $202. Therefore this way, you essentially went SHORT the USD/JPY to the tune of 200,000Y. Method #2: USD/JPY at 107, as before. Buy 200,000Y stock, but let IB create a loan. Now you are long 200,000Y stock, Short 200,000Y and you are given a USD credit of $1869. Therefore your USD cash balance is: $11,869. For this loan, I will pay IB ~$40/year in interest on the short Yen. Now, again USD/JPY rallies to 120. You dump your stock at BE, for 200,000 Yen. You pay back your loan for 200,000Y, and $1667 is deducted from your cash balance. Your resulting balance is that you MADE $202. Therefore, it appears to me that Method #1 is if you want to be SHORT USD/JPY, whereas you would use method #2 to be LONG USD/JPY. Is this line of thinking correct? And please, no posts about how for such a small sum of money who cares about the FX risk. Its the PRINCIPLE I want to be verified, not the actual dollar amounts. thanks and regards
IN doing further research, I think method #2 is all wet. What would happen is: $10,000 in account. When IB loans you the 200,000Y, it subtracts the actual cash equivalent of the stock from your account, while at the same time creating a USD and JPY column for accounting purposes which indicates your position. So, with USD/JPY at 107, you would see: USD: 10,000 ($8131 + $1869 USD from FX) JPY: -200,000 Net USD: $8131. (The same as method #1). In the meantime the $1869/200,000Y FX trade is going to be marked to market as the exchange rate fluctuates and is subject to 2% margin. The FX mark to market will be reflected on a dollar basis in your Net amount. Now, USD/JPy goes to 120 and you sell your stock at BE. You buy back your 200,000Y and get back $1667 and see: USD: $8131+$1667 = $9798 JPY: 0 Net USD: $9798, for a loss of $202. Therefore either way you are getting short the USD/JPY when you buy japanese stock-which is what makes intuitive sense. I think I am clear on this thanks.