Currency and credit processing in Trader Workstation (TWS)

Find out how currency and credit management in TWS differs from Metatrader.

  1. Currency and credit  in Metatrader
  2. Currency and credit in TWS

1. Currency and credit in Metatrader

Metatrader accounts are associated with a single base currency. All profits and losses, commission charges, interest, dividends, etc., regardless of the currency of the underlyings, are converted in real time to the base currency at the conversion price of each instant, without any additional markup or commission.

Furthermore, all transactions, regardless of the account balance and size of the transaction, are made on credit. This means that there is never any currency risk on the total of the operation, only on the profits and losses opened at any moment.

Example

Let's assume that in an account whose base currency is EUR we have 10,000 EUR and we open 100 US shares at $50 a share with the EURUSD trading at 1.20. The nominal value of the operation is $5,000 and to open it, Darwinex lends the client this amount to make the operation, for which the client will pay interest daily. Thus, even if the price of the EURUSD rises or falls, the debt of $5,000 does not change. Consequently, if the client sells for example the 100 shares at $50 when the EURUSD price has risen to $1.40, after selling the client disposes of the $5,000 he owes and therefore has no currency risk.

2. Currency and credit in TWS

IBKR's trading account is multi-currency although it allows us to see the account equity in a reference currency by applying in real time the exchange rates of all the open balances against that reference currency. In Darwinex, the reference currency of the account is that of the Darwinex Wallet of each user.

Profits and losses are always generated in the currency of the underlying, which means that as we generate closed PnL, currencies are accumulated in those underlyings.

On the other hand, in order to open trades in an asset, we must have the nominal value of that trade in that currency beforehand. This can be achieved in two ways.

  1. By changing previously from another currency available in the account to be able to open the operation.
  2. By borrowing from Darwinex, for which Darwinex will charge us daily interest.

In case 1, the client assumes a currency risk on the total amount exchanged, and in case 2, it would be a very similar operation to that of Metatrader, but in this case paying interest only on the money borrowed, not on the total amount of the operation.

Example

A client has 10,000 EUR in TWS, and wishes to buy 100 shares of XXX at $50 each, quoting the eurusd at 1.20.

Step 1

The client orders the trade. In this case, Darwinex lends him $5,000 and in the TWS account the client will see the following.

  • Balance in eur: 10,000
  • Balance in usd: -5.000
  • Balance in shares: 50 shares of XXX
  • Equity in eur: 10,000 eur

On the positive balance the customer will charge interest (provided the rates are positive) and on the negative balances the customer will pay interest. See interest rates.

Step 2

Time passes and the client closes his exposure quoting XXX at $60 and the eurusd at 1.40. He will see the following in the terminal (for simplicity, we'll assume no commissions, interest, etc. have been charged).

  • Balance in eur: 10.000
  • Balance in usd: 1.000
  • Balance in shares: 0
  • Equity in eur: 10,714.29 eur

The customer only assumes currency risk on the profits and losses, not on the total transaction.

Step 3

The client wishes to open 100 YYY shares which are quoted at $100 with the eurusd at $1.40.

He does not want to pay interest on this operation and wants to assume currency risk in return. Consequently he changes 9,000/1.40= 6428.57 eur for 9,000$ and opens the trade. For this currency exchange operation, commissions are charged. For simplicity's sake, we consider that there are no commissions.

Iin his terminal, he will see:

  • Balance in eur: 3.571,43 eur
  • Balance in usd: 0 usd
  • Share balance: 100 YYY shares
  • Equity in eur: 10,714.29 eur

Step 4

The client closes the deal with the share price at $110 and the eurusd at $1.60. Thus, the balance sheet is as follows.

  • Balance in eur: 3,571.43 eur
  • Balance in usd: 11.000 usd
  • Balance in shares: 0
  • Equity in eur: 10,446.43 eur

In this example we see how the equity in eur decreases despite the fact that the operation earned 1,000 usd, because the usd depreciated a lot over the lifespan of the operation. The client took currency risk on the 6,428.57 eur he changed to acquire the $9,000 he needed, on the $1,000 generated in the previous trade he decided not to change, and the $1,000 profit from this trade.

Step 5

Let's now assume, to make it a little more complicated, that the client wishes to take a short position of 50 ZZZ shares trading at $100. To do this Darwinex lends ZZZ shares to the client so that he can sell them. For this loan the client will have to pay interest which will depend on the available supply of long shares on the market. In other words, if a share has a strong selling demand in relation to the total shares available, the rates will be higher. The client must be aware of the credit risk he or she assumes in these operations. Before taking a position, he must know the interest rate applied to the short of a stock.

He finally borrows these shares and sells them at $100, with the eurusd trading at $1.60. Thus his portfolio will be composed of:

  • Balance in eur: 3,571.43 eur
  • Balance in usd: 16,000 usd (increases by 5,000 usd when the shares are sold)
  • Balance in shares: -50 ZZZ shares (owes shares)
  • Equity in eur: 10,446.43 eur

Step 6

The client closes the deal by buying the ZZZ shares at $90, returning them to Darwinex, and pricing eurusd at 1.50.

Final status of the portfolio:

  • Balance in eur: 3,571.43 eur
  • Balance in usd: 11.500 usd
  • Balance in shares: 0
  • Equity in eur: 11,238.10 eur

 

As can be seen from these examples, TWS is somewhat more complex than Metatrader. In exchange, the client has much more versatility to manage the currency risk or the interest he wants to pay to make his trades.