The Carry Trade That Wasn't: P&L, Cross Rates, and Puffery
Renata has a $100,000 account at a forex dealer member and tells her associated person (AP) she wants to profit from "the interest rate gap" between the dollar and the euro. On March 3 she buys 500,000 EUR/USD; the dealer quotes 1.0848/1.0852 and she is filled at 1.0852. Nine business days later she closes when the quote is 1.0926/1.0930, filled at 1.0926. Her statement shows nine nightly rollover debits totaling $243. She computes her gain as (1.0926 - 1.0852) x 500,000 = $3,700 and calls the AP furious that "$243 was stolen." She then asks for a price on 1,000,000 EUR/JPY; the desk quotes 161.15/161.25 while EUR/USD is 1.0926/1.0930 and USD/JPY is 147.45/147.49.
1. Reconcile Renata's profit and loss. Was the $243 improper, and how should the AP explain the fills and the rollover?
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Gross P&L. She bought at the ask (1.0852) and sold at the bid (1.0926), a gain of 74 pips. On 500,000 EUR one pip is $50, so gross profit is 74 x $50 = $3,700 - her arithmetic is right.
Net P&L. $3,700 - $243 = $3,457, or 3.46% on the $100,000 account, not the 3.7% she is quoting to friends.
The $243. The dealer is the counterparty quoting a two-sided market; a customer necessarily crosses the spread entering and exiting. That is disclosed in the customer agreement and the risk disclosure, so the entry and exit fills are not evidence of misconduct. Rollover is the interest-rate differential between the two currencies, plus whatever markup the dealer discloses in its swap schedule. A long EUR/short USD position pays the differential when U.S. rates exceed euro rates, which is consistent with a debit. The AP's job is to pull the published swap schedule and confirm nine nights at the stated rate reconciles to $243. If the debit exceeds the disclosed schedule, that is a separate pricing issue to escalate - but the AP may not tell her the spread or the swap "doesn't count."
Conduct point. Don't dismiss the complaint; log it, document the reconciliation, and correct the 3.7% claim in writing.
2. Derive the synthetic EUR/JPY bid and ask from the two USD quotes, assess the desk's 161.15/161.25 quote, compute the round-trip cost on 1,000,000 EUR, and state the security deposit required.
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Synthetic cross. Bid = EUR/USD bid x USD/JPY bid = 1.0926 x 147.45 = 161.10. Ask = 1.0930 x 147.49 = 161.21.
Dealer quote. 161.15/161.25 is not the synthetic market. The bid is 0.05 JPY richer than the synthetic bid, but the ask is 0.04 JPY worse than the synthetic ask. A customer buying pays 161.25 instead of 161.21 - an extra 0.04 JPY per EUR, or JPY 40,000 on 1,000,000 EUR (about $272 at 147.45). The customer is paying the desk's cross spread on top of the spread already embedded in the two legs. That can be legitimate, but the dealer must be able to show its cross pricing is consistent with its disclosed markup; inconsistent, one-directional skew is a supervisory red flag.
Round trip. 161.25 - 161.15 = 0.10 JPY per EUR, or JPY 100,000 on 1,000,000 EUR (roughly $678).
Security deposit. EUR and JPY are both major currencies, so the 2% requirement applies even though USD is not in the pair. USD notional = 1,000,000 x 1.0930 = $1,093,000; deposit = $21,860. A common error is to apply the 5% non-major rate to crosses.
3. Renata now wants $90,000 of her equity committed to a short USD/TRY position for the carry, and her AP says, "carry on that pair is guaranteed positive." Evaluate the statement, the margin consequence, and what the AP must do before accepting the order.
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The statement is false and prohibited. Carry is the interest differential adjusted by the dealer's swap markup; it changes with rates and can flip sign. More importantly, carry is only one component of return - a short USD/TRY position is long the lira, so a depreciation of the lira swamps any positive carry. Promising or implying a guaranteed positive result is a guarantee against loss, prohibited under the antifraud provisions and NFA promotional standards, and it is exactly the kind of statement that turns a losing trade into a restitution case.
Margin consequence. TRY is not a major currency, so the 5% security deposit applies. $90,000 of equity supports roughly $1.8 million notional - a 2.5% adverse move in USD/TRY wipes out half her account, and a 5% move closes it out. Given her remaining $10,000 buffer, she has effectively no room for an ordinary news-driven move.
Before accepting the order. Re-confirm her financial information and investment experience, document why a concentrated emerging-market position is suitable for a retiree-scale account (or decline it), state plainly in writing that carry can be negative and that the 5% deposit permits roughly 20:1 leverage, and provide the written risk disclosure and swap schedule. If she insists on "guaranteed" terms, the AP must refuse the characterization, not the order.