Question

Which best explains how currency traders can buy large amounts of a currency with little money up front?

Answer 1

Answer:

B. They buy on margin to provide leverage for a large purchase.

Explanation:

Currency traders are able to buy large amounts of currency with little money by buying on margin to provide leverage for a large purchase. Buying on margin points to the initial payments made to a broker for an asset being purchased (in this case, currency). It involves purchasing assets by using leverage and borrowing the balance from a bank or broker. It allows investors to be able to make investments with brokers' money. They act as leverage and therefore are capable of magnifying gains.

Answer 2

Group of answer choices:

A) They sell shares in their enterprise to provide investment capital.

B) They buy on margin to provide leverage for a large purchase.  

C) They purchase only currencies with a very low exchange rate.  

D) They use a bond issue to raise money for their trades.

Answer:

The correct answer is letter "B": They buy on margin to provide leverage for a large purchase.

Explanation:

Margin accounts allow traders to make transactions by leveraging the real amount of money they have in their accounts. Most brokers offer a leverage of 2:1 which implies individuals can trade twice the real amount of money they have but the ratio varies from broker to broker. Some offer 100:1 leverage ratios.  

In such a way, traders can enter in larger positions increasing their profit chances but their losses as well. If the trade does not go as expected, traders may end up owing even more money to what they had in their accounts.