If a trader bought one U.S. dollar for 1.23 Swiss francs and later sold that U.S. dollar back for 1.21 Swiss francs, he or she would lose .02 Swiss francs. Notice the loss from the transaction is in francs. The interbank market quotes all currencies except the British pound sterling as U.S. dollar-based. Pound sterling quotes are usually currency-based in the interbank world. Margins and Lines of Credit Currency transactions are executed under various conditions based on the creditworthiness of the counterparties.
Lines of credit are the main mechanisms for executing forex transactions.
Margin trading also is the cornerstone of futures trading. The interbank market uses margin trading for less creditworthy customers in order to maintain the integrity of the interbank transactions. Margins are, in effect, performance bonds. Futures exchanges have created elaborate systems to calculate margins, taking into account the historical volatility of a currency and the total value of the standardized futures contract. The interbank market takes its lead from the futures exchanges' calculations and also uses margin amounts as a lever to control the volume a customer may trade at any one time.