[DerivativeABC] Curious About 'FX Margin' Trading?

[Asia Economy Reporter Park Jihwan] 'FX margin' trading refers to a type of arbitrage trading designed so that profits and losses are determined by exchange rate fluctuations while simultaneously buying and selling multiple currencies.

In particular, it is used when buying and selling currencies of countries with high exchange rate volatility to earn arbitrage profits based on exchange rate changes. This year, due to the COVID-19 pandemic, exchange rate volatility increased like stocks, leading to a rapid rise in investments among individual investors.

Currently, in Korea, investments can only be made through financial companies licensed by the Financial Services Commission for financial investment business. The basic transaction unit is 100,000 units of the base currency, and an initial margin of 10,000 dollars per transaction unit (at least about 12 million won) must be deposited.

It is a method of indirect trading by depositing a certain margin and settling the difference in foreign currency, which can be several to tens of times the margin (settling only the difference between purchase and sale prices). In other words, since leverage exceeding 10 times can be used, it means that there can be high profits as well as large losses.

Because it is a type of trading that can yield profits comparable to a lottery, there are also cases where people are deceived by illegal FX margin trading and lose huge amounts of investment funds. Some YouTubers even encourage investments by claiming to have earned tens of millions to hundreds of millions of won through FX margin trading.

Private FX margin trading is considered a form of gambling, as the Supreme Court has ruled that it is not a financial investment product under the Capital Markets Act. Especially, consumers who invest in private FX margin trading are not protected by deposit insurance nor are they subject to complaints or dispute mediation by the Financial Supervisory Service, so caution is required.