How People Make or Lose Money Doing It:
By converting your money into a different currency, you are hoping that the new currency increases in value. When you convert back to your initial currency, ideally you will have more money than you started with.

Let's take a look at an example of how someone can make money from a forex transaction. Suppose you have $1,000 U.S. dollars and you want to exchange them for Canadian Dollars. Assume the current USD/CAD exchange rate is 1.33. This means 1 U.S. Dollar is worth 1.33 Canadian Dollars. For reference, at this point, 1 CAD is worth 0.75 USD (1 divided by 1.33). Converting your $1000 USD to CAD will give you $1,333 Canadian dollars ($1,000 USD x 1.33). One week later, the Canadian Dollar strengthens against the U.S. dollar. Assume the Canadian Dollar is now worth .80 USD rather than the 0.75 from one week ago. This means that 1 U.S. Dollar is now worth 1.25 CAD (1 USD divided by 0.8). Since you hold Canadian dollars and want to convert them to USD, you need to multiply by the CAD/USD rate of 0.8. In summary, you could exchange the $1,333 CAD you have back into U.S. dollars and receive $1,066 USD ($1,333 x .80).

So you started with $1,000 USD, you now have $1,066 USD, a profit of $66 USD.

Your Decision

CAD

USD

You sell your USD to buy CAD. (1 USD = 1.25 CAD)

You buy 1,333 CAD at the
CAD/USD rate of 0.75

+1,333

-1000

A week later, the CAD/USD rises to 0.80 and you exchange your 1,333 CAD back into U.S. dollars

-1,333

+1066

Profit

 

+66

 

Buying And Selling

Related Articles
  1. Trading

    How to Calculate an Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  2. Trading

    Why U.S. Dollars Aren't Accepted in Canada

    Is the U.S. dollar accepted in Canada? Learn about the legal and practical aspects of using U.S. dollars in Canadian transactions.
  3. Personal Finance

    5 Products That Cost Way More In Canada

    Despite the CAD flirting with parity to the USD, many Canadians still shop stateside for deals. Here are five products that are always cheaper to buy in the U.S. than in Canada.
  4. Personal Finance

    Quiz: Are Your Finances Above Average?

    We look at average Canadian debt, credit scores and much more so you can find out how you stack up.
  5. Trading

    Using interest rate parity to trade forex

    Learn the basics of forward exchange rates and hedging strategies to understand interest rate parity – fundamental knowledge for foreign-currency traders.
  6. Investing

    Currency ETFs Simplify Forex Trades

    Reduce your stock portfolio's risk by trading with foreign currencies.
  7. Insights

    Cross-Border Shopping: Bane Or Boon?

    Lower prices, better selection, lower sales tax rates and a strong Canadian dollar draw over 1.9 million Canadians over the border to shop every month.
  8. Trading

    Traveling Abroad? Get the Best Exchange Rates

    When you exchange currencies, here’s how to make sure you are getting top value on the trade.
  9. Trading

    Play Foreign Currencies Against The U.S. Dollar And Win

    Don't panic when the dollar drops. Learn to exploit the greenback's decline and profit from it.
  10. Investing

    How Rising Rates Impact Investment Strategies

    Interest rates are on the rise. Here's what that means for investing strategies.
Frequently Asked Questions
  1. Which Schools Did Warren Buffett Attend?

    Warren Buffett attended multiple prestigious schools on his path to success, but he places much more significance on real-world ...
  2. What are some examples of expansionary monetary policy?

    Learn about expansionary monetary policy and how central banks use discount rates, reserve ratios and purchases of securities ...
  3. What is the role of the nation-state in globalization?

    Learn about the evolving role of the nation-state in an increasingly globalized world as fewer boundaries restrict international ...
  4. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in macroeconomics and microeconomics, including demand and price, ...
Trading Center