In order to consider what the financial consequences of a transaction can be on the CFD market, it is advisable to be acquainted with the value of each point on the given market. Imagine you are looking at a price of 1,4400 on the EURUSD market. How much would the move to 1,4500 be worth for one CFD contract?
There is one important term that can help with the calculations. Point, also known as pips, is the smallest change of price on a given market. In other words, the difference between 1,4401 and 1,4400 is 0,0001 – namely 1 point (or pips). The difference between 1,4500 and 1,4400 consists of 100 such points (pips).
Example
As an example, let us consider an investor who is willing to take a long position on the EURUSD market. The current market price is 1,4400, and the account is maintained in Czech korunas.
The volume of the transaction is 1 contract. The investor does not want to lose more then 40 points, in other words he has decided to close the position once the price of the EURUSD falls to 1,4360 (this can be done automatically using a stop loss order, see the Orders section). How much money is at risk in a negative scenario?
One solution is identical to calculating the total result of transaction. It would be like the following:
Negative scenario result = (closing price 1,4360 – opening price 1,4400) * nominal value 100 000 = 400 USD (second currency in EURUSD pair)
Assuming that the USDCZK price is 20,00 the result is 400 USD * 20 USDCZK = 8 000 CZK
Point value = (point 0,0001/EUR USD price 1,4360) * nominal value 100 000 EUR * EUR USD price 1,4360 = 10 USD
Assuming that the USDCZK price is 20,00, the point value is 200 CZK.
Negative scenario result = 40 points at risk * 200 CZK point value = 8000 CZK
This approach can be more flexible in some situations, for example in order to determine how much would be at risk with a stop loss order set at 35 points. This would be simply 35* 200 CZK = 7000 CZK. Consequently, a potential profit of 60 points would be worth 60*200 CZK = 12 000 CZK.
Coming back to the example from the beginning of this section, the EURUSD market move from 1,2400 to 1,2500, namely 100 points, is worth exactly 100*200 CZK = 20 000 CZK for one contract.