In the forex market when a trade is made you are not buying and selling the same as equity. If you were to purchase/go long EUR/USD the transaction would involve borrowing USD to purchase EUR. The amount that you have to put down as a margin will depend on your broker and may be as low as 0.25%.
You will have to pay the interest daily for the currency you borrowed(USD) and receive the interest on the currency you deposited. If the interest on the USD=2% and the interest on the EUR=5% you will earn 3%(the difference) annually. If you had went the other direction you would lose 3% annually. Interest is usually calculated daily but your broker may only capitalize this weekly or monthly.
Not long ago the Japanese carry trade was an example of how traders profited from this differential.
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In the forex market when a trade is made you are not buying and selling the same as equity. If you were to purchase/go long EUR/USD the transaction would involve borrowing USD to purchase EUR. The amount that you have to put down as a margin will depend on your broker and may be as low as 0.25%.
You will have to pay the interest daily for the currency you borrowed(USD) and receive the interest on the currency you deposited. If the interest on the USD=2% and the interest on the EUR=5% you will earn 3%(the difference) annually. If you had went the other direction you would lose 3% annually. Interest is usually calculated daily but your broker may only capitalize this weekly or monthly.
Not long ago the Japanese carry trade was an example of how traders profited from this differential.