1. Reduce Your Trading Frequency
Many traders think the more they trade the more their profit potential will be and they don't like not being in the market in case they miss a big move. They end up trading to much and taking low odds trades and lose.
You don't get rewarded for how often you trade - you get rewarded for being right with your trading signal and that's it.
I know trades who trade only a few times a year and make triple digit profits.
Their not interested in the buzz of trading, just taking trades they know will be big trends they can hold and make money with.
2. Do Not Diversify!
You will here a lot about not putting your eggs all in one basket as a way to reduce risk but there is a problem - it dilutes profit potential and most traders who start trading in forex simply don't have big enough accounts to diversify.
When you see a high odds trade on your forex trading system then you need to focus on it and not be tempted take other marginal trades for the sake of it, this leads onto the next point.
3. Load the Trade Up
Another common wisdom is only risk 2% per trade - but for most forex traders this is too little and simply ensures they get stopped out by normal volatility.
Let's say you are trading a small account of $3,000, risking 2%, that's just $60!
You won't make much risking that.
Risk and reward go hand in hand, so the more you risk the more you can make.
This doesn't mean that you have to be rash but you need to take calculated risks at the right time and if you believe in a trade load it up.
If you have a small account then you should be risking between 10 - 20% on these trades. The high odds trades don't come around often, so you need to milk them for all there worth.
Finally....
If you don't like risk or try and restrict it to much, you will simply consign yourself to failure. You also need to have the courage to hit trades hard at the right time and be patient to wait for the high odds set ups to emerge.
If you are a trader who wants to make more money from their trading then the above 3 tips will help you do so and enjoy currency trading success.
Thursday, 27 September 2012
Monday, 24 September 2012
The Credit Crisis And The Carry Trade
Broadly speaking, the term "carry trade" means borrowing at a low interest rate and investing in an asset that provides a higher rate of return. For example, assume that you can borrow $20,000 at an interest rate of 3% for one year; further assume that you invest the borrowed proceeds in a certificate of deposit that pays 6% for one year. After a year, your carry trade has earned you $600, or the difference between the return on your investment and the interest paid times the amount borrowed.
Of course, in the real world, opportunities like these rarely exist because the cost of borrowing funds is usually significantly higher than interest earned on deposits. But what if an investor wishes to invest low-cost funds in an asset that promises spectacular returns, albeit with a much greater degree of risk? In this case, we are referring to the currency, or forex, markets, where carry trades quickly became one of the most important strategies. These trades allowed some traders to rake in big profits, but they also played a part in the credit crisis that struck world economic systems in 2008.
In the 2000s, the term "carry trade" became synonymous with the "yen carry trade," which involved borrowing in the Japanese yen and investing the proceeds in virtually any asset class that promised a higher rate of return. The Japanese yen became a favored currency for the borrowing part of the carry trade because of the near-zero interest rates in Japan for much of this period. By early 2007, it was estimated that about U.S.$1 trillion had been invested in the yen carry trade.
Carry trades involving riskier assets are successful when interest rates are low and there is ample global appetite for risky assets. This was the case in the period from 2003 until the summer of 2007, when interest rates in a number of nations were at their lowest levels in decades, while demand surged for relatively risky assets such as commodities and emerging markets.
The unusual appetite for risk during this period could be gauged by the abnormally low level of volatility in the U.S. stock market (as measured by the CBOE Volatility Index or VIX), as well as by the low-risk premiums that investors were willing to accept (one measure of which was the historically low spreads of high-yield bonds and emerging market debt to U.S. government Treasury Bills (T-Bills).
Carry trades work on the premise that changes in the financial environment will occur gradually, allowing the investor or speculator ample time to close out the trade and lock in profits. But if the environment changes abruptly, investors and speculators could be forced to close their carry trades as expeditiously as possible. Unfortunately, such a reversal of innumerable carry trades can have unexpected and potentially devastating consequences for the global economy.
In order to get more bang for their buck, large investors such as hedge funds used a substantial degree of leverage in order to magnify returns. But leverage is a double-edged sword - just as it can enhance returns when markets are booming, it can also amplify losses when asset prices are sliding.
As the carry trade gained momentum, a virtuous circle developed, whereby borrowed currencies such as the yen steadily depreciated, while the demand for risky assets pushed their prices higher.
It is important to note that currency risk in a carry trade is seldom, if ever, hedged. This meant that the carry trade worked like a charm as long as the yen was depreciating, and mortgage and commodity portfolios were providing double-digit returns. Scant attention was paid to early warning signs such as the looming slowdown in the U.S. housing market, which peaked in the summer of 2006 and then commenced its long multiyear slide.
Let's run through an example of a yen carry trade to see what can happen when the market is booming and when it goes bust.
Borrow 100 million yen for one year at 0.50% per annum.
Sell the borrowed amount and buy U.S. dollars at an exchange rate of 115 yen per dollar.
Use this amount (approximately US0,000) as 10% margin to acquire a portfolio of mortgage bonds paying 15%.
The size of the mortgage bond portfolio is therefore .7 million (i.e. 0,000 is used as 10% margin, and the remaining 90%, or .83 million, is borrowed at 5%).
After one year, assume the entire portfolio is liquidated and the yen loan is repaid. In this case, one of two things might occur:
Scenario 1 (Boom Times)
Assume the yen has depreciated to 120, and that the mortgage bond portfolio has appreciated by 20%.
Total Proceeds = Interest on Bond Portfolio + Proceeds on Sale of Bond Portfolio
= ,305,000 + ,440,000 = ,745,000
Total Outflows = Margin Loan (.83 million principal + 5% interest) + Yen Loan (principal + 0.50% interest)
= ,221,500 + 100,500,000 yen
= ,221,500 + 7,500 = ,059,000
Overall Profit = ,686,000
Return on Investment = ,686,000 / 0,000 = 310%
Scenario 2 (Boom Turns to Bust)
Assume the yen has appreciated to 100, and that the mortgage bond portfolio has depreciated by 20%.
Total Proceeds = Interest on Bond Portfolio + Proceeds on Sale of Bond Portfolio
= ,305,000 + ,960,000 = ,265,000
Total Outflows = Margin Loan (.83 million principal + 5% interest) + Yen Loan (principal + 0.50% interest)
= ,221,500 + 100,500,000 yen
= ,221,500 + ,005,000 = ,226,500
Overall Loss = 1,500
Return on Investment = -1,500 / 0,000 = -110%
The yen carry trade became all the rage among investors and speculators, but by 2006, some experts began warning of the dangers that could arise if and when these carry trades were reversed or "unwound." These warnings went unheeded.
The global credit crunch that developed from August 2007 led to the gradual unraveling of the yen carry trade. A little over a year later, as the collapse of Lehman Brothers and the U.S. government rescue of AIG sent shockwaves through the global financial system, the unwinding of the yen carry trade commenced in earnest.
Speculators began to be hit with margin calls as prices of practically every asset began sliding. To meet these margin calls, assets had to be sold, putting even more downward pressure on their prices. As credit conditions tightened dramatically, banks began calling in the loans, many of which were yen-denominated. Speculators not only had to sell their investments at fire-sale prices, but also had to repay their yen loans even as the yen was surging. Repatriation of yen made the currency even stronger. In addition, the interest rate advantage enjoyed by higher-yielding currencies began to dwindle as a number of countries slashed interest rates to stimulate their economies.
The unwinding of the gigantic yen carry trade caused the Japanese currency to surge against major currencies. The yen rose as much as 29% against the euro in 2008. By February 2009, it had gained 19% against the U.S. dollar.
Large-scale unwinding of the carry trade can also result in plunging asset prices, especially under tight credit conditions, as speculators resort to panic liquidation and rush to get out of trading positions at any price. Numerous hedge funds and trading houses had to contend with huge losses in the aftermath of the unwinding of the yen carry trade.
Banks may also be affected if their borrowers are unable to repay their loans in full. But as the events of 2008 proved, the broad decline in asset prices had a much larger impact on their balance sheets. In 2008, financial institutions around the world recorded close to $1 trillion in charge-offs and write-downs related to U.S. mortgage assets.
The global economy was also severely affected, as the collapse in asset prices affected consumer confidence and business sentiment, and exacerbated an economic slowdown. Nations whose currencies were heavily involved in the carry trade (such as Japan) would also face economic headwinds, as an unusually strong domestic currency can render exports uncompetitive.
The Bottom Line
Carry trades involving riskier assets are successful when interest rates are low and there is ample global appetite for risky assets. When boom times turn to bust, however, these trades have proved devastating for traders and for the broader markets.
Of course, in the real world, opportunities like these rarely exist because the cost of borrowing funds is usually significantly higher than interest earned on deposits. But what if an investor wishes to invest low-cost funds in an asset that promises spectacular returns, albeit with a much greater degree of risk? In this case, we are referring to the currency, or forex, markets, where carry trades quickly became one of the most important strategies. These trades allowed some traders to rake in big profits, but they also played a part in the credit crisis that struck world economic systems in 2008.
A New Millennium for Carry Trades
Carry trades involving riskier assets are successful when interest rates are low and there is ample global appetite for risky assets. This was the case in the period from 2003 until the summer of 2007, when interest rates in a number of nations were at their lowest levels in decades, while demand surged for relatively risky assets such as commodities and emerging markets.
The unusual appetite for risk during this period could be gauged by the abnormally low level of volatility in the U.S. stock market (as measured by the CBOE Volatility Index or VIX), as well as by the low-risk premiums that investors were willing to accept (one measure of which was the historically low spreads of high-yield bonds and emerging market debt to U.S. government Treasury Bills (T-Bills).
Carry trades work on the premise that changes in the financial environment will occur gradually, allowing the investor or speculator ample time to close out the trade and lock in profits. But if the environment changes abruptly, investors and speculators could be forced to close their carry trades as expeditiously as possible. Unfortunately, such a reversal of innumerable carry trades can have unexpected and potentially devastating consequences for the global economy.
Why the Carry Trade Works
As noted earlier, during the boom years of 2003-2007, there was large-scale borrowing of Japanese yen by investors and speculators. The borrowed yen was then sold and invested in a variety of assets, ranging from higher-yielding currencies, such as the euro, to U.S. subprime mortgages and real estate, as well as in volatile assets such as commodities and emerging market stocks and bonds.In order to get more bang for their buck, large investors such as hedge funds used a substantial degree of leverage in order to magnify returns. But leverage is a double-edged sword - just as it can enhance returns when markets are booming, it can also amplify losses when asset prices are sliding.
As the carry trade gained momentum, a virtuous circle developed, whereby borrowed currencies such as the yen steadily depreciated, while the demand for risky assets pushed their prices higher.
It is important to note that currency risk in a carry trade is seldom, if ever, hedged. This meant that the carry trade worked like a charm as long as the yen was depreciating, and mortgage and commodity portfolios were providing double-digit returns. Scant attention was paid to early warning signs such as the looming slowdown in the U.S. housing market, which peaked in the summer of 2006 and then commenced its long multiyear slide.
Example - Leverage Cuts Both Ways in Yen Carry Trade
Let's run through an example of a yen carry trade to see what can happen when the market is booming and when it goes bust.
Borrow 100 million yen for one year at 0.50% per annum.
Sell the borrowed amount and buy U.S. dollars at an exchange rate of 115 yen per dollar.
Use this amount (approximately US0,000) as 10% margin to acquire a portfolio of mortgage bonds paying 15%.
The size of the mortgage bond portfolio is therefore .7 million (i.e. 0,000 is used as 10% margin, and the remaining 90%, or .83 million, is borrowed at 5%).
After one year, assume the entire portfolio is liquidated and the yen loan is repaid. In this case, one of two things might occur:
Scenario 1 (Boom Times)
Assume the yen has depreciated to 120, and that the mortgage bond portfolio has appreciated by 20%.
Total Proceeds = Interest on Bond Portfolio + Proceeds on Sale of Bond Portfolio
= ,305,000 + ,440,000 = ,745,000
Total Outflows = Margin Loan (.83 million principal + 5% interest) + Yen Loan (principal + 0.50% interest)
= ,221,500 + 100,500,000 yen
= ,221,500 + 7,500 = ,059,000
Overall Profit = ,686,000
Return on Investment = ,686,000 / 0,000 = 310%
Scenario 2 (Boom Turns to Bust)
Assume the yen has appreciated to 100, and that the mortgage bond portfolio has depreciated by 20%.
Total Proceeds = Interest on Bond Portfolio + Proceeds on Sale of Bond Portfolio
= ,305,000 + ,960,000 = ,265,000
Total Outflows = Margin Loan (.83 million principal + 5% interest) + Yen Loan (principal + 0.50% interest)
= ,221,500 + 100,500,000 yen
= ,221,500 + ,005,000 = ,226,500
Overall Loss = 1,500
Return on Investment = -1,500 / 0,000 = -110%
The Great Unraveling of the Yen Carry Trade
The global credit crunch that developed from August 2007 led to the gradual unraveling of the yen carry trade. A little over a year later, as the collapse of Lehman Brothers and the U.S. government rescue of AIG sent shockwaves through the global financial system, the unwinding of the yen carry trade commenced in earnest.
Speculators began to be hit with margin calls as prices of practically every asset began sliding. To meet these margin calls, assets had to be sold, putting even more downward pressure on their prices. As credit conditions tightened dramatically, banks began calling in the loans, many of which were yen-denominated. Speculators not only had to sell their investments at fire-sale prices, but also had to repay their yen loans even as the yen was surging. Repatriation of yen made the currency even stronger. In addition, the interest rate advantage enjoyed by higher-yielding currencies began to dwindle as a number of countries slashed interest rates to stimulate their economies.
The unwinding of the gigantic yen carry trade caused the Japanese currency to surge against major currencies. The yen rose as much as 29% against the euro in 2008. By February 2009, it had gained 19% against the U.S. dollar.
Carry Trade Casualties
The carry trade pushes asset prices to unsustainably high levels when the global economy is expanding. But rapid and unexpected changes in the financial environment can result in the virtuous circle quickly turning into a vicious one. In 2008, global financial markets suffered record declines after being hit by a deadly combination of slowing economic growth, an unprecedented credit crisis and a near-total collapse of consumer and investor confidence.Large-scale unwinding of the carry trade can also result in plunging asset prices, especially under tight credit conditions, as speculators resort to panic liquidation and rush to get out of trading positions at any price. Numerous hedge funds and trading houses had to contend with huge losses in the aftermath of the unwinding of the yen carry trade.
Banks may also be affected if their borrowers are unable to repay their loans in full. But as the events of 2008 proved, the broad decline in asset prices had a much larger impact on their balance sheets. In 2008, financial institutions around the world recorded close to $1 trillion in charge-offs and write-downs related to U.S. mortgage assets.
The global economy was also severely affected, as the collapse in asset prices affected consumer confidence and business sentiment, and exacerbated an economic slowdown. Nations whose currencies were heavily involved in the carry trade (such as Japan) would also face economic headwinds, as an unusually strong domestic currency can render exports uncompetitive.
The Bottom Line
Carry trades involving riskier assets are successful when interest rates are low and there is ample global appetite for risky assets. When boom times turn to bust, however, these trades have proved devastating for traders and for the broader markets.
Friday, 21 September 2012
Guide to buying bonds
How and where to invest wisely in the bond market
If you've stuck with the lesson to this point, you are probably interested in knowing more about how to purchase bonds. Here are the main ways:
With the exception of Treasuries, buying individual bonds isn't for the faint of heart. Most new bonds are issued through an investment bank, or "underwriter," rather than directly to the public. The issuer swallows the sales commission, so you get the same price big investors pay.
That's why, when buying individual bonds, you should buy new issues directly from the underwriter whenever possible - since you're getting them at wholesale.
Older bonds are another matter. They are traded through brokers on the "secondary market," usually over the counter rather than on an exchange, such as the New York Stock Exchange. Here, transaction costs can be much higher than with stocks because spreads - the difference between what a dealer paid for a bond and what he'll sell it for - tend to be wider.
You will seldom know what spread you paid, unfortunately, because the markup is set by the dealer and built into the price of the bond. There is no fixed commission schedule. One ray of sunshine: In early 2002 the Bond Market Association began posting some muni bond prices on its website. Alas, the prices include dealer markups because dealers protested listing commissions separately.
If you do plan to invest in individual bonds, you should probably have enough money to invest - say $25,000 to $50,000 at a minimum - to achieve some degree of diversification. If you have less, consider bond funds.
Exactly how you invest depends largely on your objective:
- If your objective is to achieve capital gains, concentrate on long-term issues. Reason: as noted in "Sizing up risks," the longer the term of a bond, the more pronounced are its price swings when interest rates move. That works to your advantage if interest rates fall. Your long-term bonds - especially zero-coupon bonds - will suddenly be worth a lot more. Of course, it works to your distinct disadvantage if interest rates rise; your portfolio drops in value. This kind of bond investing is essentially a bet that interest rates will fall, and its subject to all the same risks - including that of substantial losses - as any other market-timing strategy.
- If your objective is a steady, secure stream of income, adopt a more conservative approach. Specifically:
Stick to shorter terms. Bonds with maturities of one to 10 years are sufficient for most long-term investors. They yield more than shorter-term bonds, and are less volatile than longer-term issues.
Spread your money around. Invest in a variety of bonds with different maturities, either by buying a bond fund or buying a half-dozen or more individual bonds.
Build a laddered portfolio. Each rung of your ladder consists of a different maturity bond, from one year right on up to 10 years. When the one-year bond matures, you reinvest the money in a new, 10-year issue. In this way, you always have more money to reinvest every year, and you are somewhat protected from interest rate shifts because you have locked in a range of yields.
It can make sense to buy individual bonds if you own a lot of them and hold them to maturity, but most people are better off buying bonds through mutual funds. The biggest reason is diversification. Because bonds are sold in large units, you might only be able to purchase one or a handful of bonds on your own, but as a bond fund holder you'll own stakes in dozens, perhaps hundreds, of bonds.
You will also get the benefit of professional research and money management. Another advantage: Dividends are paid monthly, versus only semiannually for individual bonds, and can be reinvested automatically. Lastly, bond funds are more liquid than individual bond issues.
The biggest drawback to bond funds - and it's a whopper - is that they don't have a fixed maturity, so that neither your principal nor your income is guaranteed. Fund managers are constantly buying and selling bonds in their portfolios to maximize their interest income and capital gains. That means your interest payments will vary, as will the fund's share price.
For this reason, don't choose a fund based only on its yield. Look at its total return, which combines the income the fund paid out with any change in the value of the fund's shares. Also, look for a fund with low expenses. (see also: "Different types of bond funds" and "Guidelines for choosing bond funds.")
Because bond funds with similar investment objectives tend to hold similar types of securities, which perform similarly, there are only two ways a fund manager can goose the yield: cut expenses or take on more risk. If a fund's yield is more than 1 percentage point higher than the average for its peers and the difference can't be explained by lower fees, the manager is probably dabbling in exotica. Top of page
If you've stuck with the lesson to this point, you are probably interested in knowing more about how to purchase bonds. Here are the main ways:
Directly from the Feds
U.S. Treasuries are sold by the federal government at regularly scheduled auctions. You can buy them through a bank or broker for a fee, but why pay for something you can get for nothing? The easiest and cheapest way to participate in this market is to buy them directly from the GCM.Through a broker
That's why, when buying individual bonds, you should buy new issues directly from the underwriter whenever possible - since you're getting them at wholesale.
Older bonds are another matter. They are traded through brokers on the "secondary market," usually over the counter rather than on an exchange, such as the New York Stock Exchange. Here, transaction costs can be much higher than with stocks because spreads - the difference between what a dealer paid for a bond and what he'll sell it for - tend to be wider.
You will seldom know what spread you paid, unfortunately, because the markup is set by the dealer and built into the price of the bond. There is no fixed commission schedule. One ray of sunshine: In early 2002 the Bond Market Association began posting some muni bond prices on its website. Alas, the prices include dealer markups because dealers protested listing commissions separately.
If you do plan to invest in individual bonds, you should probably have enough money to invest - say $25,000 to $50,000 at a minimum - to achieve some degree of diversification. If you have less, consider bond funds.
Exactly how you invest depends largely on your objective:
- If your objective is to achieve capital gains, concentrate on long-term issues. Reason: as noted in "Sizing up risks," the longer the term of a bond, the more pronounced are its price swings when interest rates move. That works to your advantage if interest rates fall. Your long-term bonds - especially zero-coupon bonds - will suddenly be worth a lot more. Of course, it works to your distinct disadvantage if interest rates rise; your portfolio drops in value. This kind of bond investing is essentially a bet that interest rates will fall, and its subject to all the same risks - including that of substantial losses - as any other market-timing strategy.
- If your objective is a steady, secure stream of income, adopt a more conservative approach. Specifically:
Stick to shorter terms. Bonds with maturities of one to 10 years are sufficient for most long-term investors. They yield more than shorter-term bonds, and are less volatile than longer-term issues.
Spread your money around. Invest in a variety of bonds with different maturities, either by buying a bond fund or buying a half-dozen or more individual bonds.
Build a laddered portfolio. Each rung of your ladder consists of a different maturity bond, from one year right on up to 10 years. When the one-year bond matures, you reinvest the money in a new, 10-year issue. In this way, you always have more money to reinvest every year, and you are somewhat protected from interest rate shifts because you have locked in a range of yields.
Through a mutual fund
You will also get the benefit of professional research and money management. Another advantage: Dividends are paid monthly, versus only semiannually for individual bonds, and can be reinvested automatically. Lastly, bond funds are more liquid than individual bond issues.
The biggest drawback to bond funds - and it's a whopper - is that they don't have a fixed maturity, so that neither your principal nor your income is guaranteed. Fund managers are constantly buying and selling bonds in their portfolios to maximize their interest income and capital gains. That means your interest payments will vary, as will the fund's share price.
For this reason, don't choose a fund based only on its yield. Look at its total return, which combines the income the fund paid out with any change in the value of the fund's shares. Also, look for a fund with low expenses. (see also: "Different types of bond funds" and "Guidelines for choosing bond funds.")
Because bond funds with similar investment objectives tend to hold similar types of securities, which perform similarly, there are only two ways a fund manager can goose the yield: cut expenses or take on more risk. If a fund's yield is more than 1 percentage point higher than the average for its peers and the difference can't be explained by lower fees, the manager is probably dabbling in exotica. Top of page
Thursday, 20 September 2012
Forex Market vs Bond Market
Both the FOREX market and the bond market can provide you
with some good opportunities as an investor. While they are both options for
you to invest in, these markets are completely different. Here are a few things
to consider about the FOREX market compared to the bond market.
Commissions
One key difference between these two types of markets is in
the way that commissions are handled. When you work with a bond broker, you are
going to have to pay commissions for every bond that you purchase. Whenever you
make a trade in the FOREX market, you will not have to worry about any
commissions. Instead, the brokers are compensated through the bid/ask spread on
each trade. This allows you to take on more transactions without negatively impacting
your returns.
Market Hours
Another big difference between these two markets is in when
you can trade. With the bond market, you are only going to be able to trade
during the regular business day. In most cases, this will be from 8:00 AM ET to
4:00 PM ET. In some cases, you will be able to trade bonds after hours but your
opportunities are not as good. With the FOREX market, you will be able to trade
anytime that you want. The only time that the market is closed is on the
weekends. Other than that, you can trade 24 hours a day if you want.
Liquidity
The liquidity of these two markets is very different.
Sometimes, it can be difficult to find a buyer or seller in the bond market.
Because of this, there are large swings in value between bonds from time to
time. With the FOREX market, this is never an issue. There are always traders
that are in the market at any given time. With over $2 trillion a daily volume,
a lot of trading is going on in this market.
Taxes
When you get involved in these markets, the taxes will be
handled differently. With bonds, you are going to receive regular interest
payments from the bond issuer. This means that you will have to count this
amount of money as regular income and pay taxes at your marginal tax rate. With
the FOREX market, the taxes are handled differently. You will most likely be
able to take advantage of paying the capital gains tax rate which is going to
be less than your marginal tax rate in most cases.
Bear Markets
In a bear market, these two types of investments are going
to act differently. In the bond market, there is really not a way to hedge
against the value of your bonds decreasing. In the FOREX market, you will be
able to place a short trade anytime that you want. This way, you will be able
to profit from a bear market.
Analysis Overload
Typically, investors will have an easier time analyzing
bonds than they will analyzing the FOREX market. With the FOREX market, there
are countless indicators and systems that you can use to trade. Many times,
this leads people to making bad decisions when it comes to trading.
Saturday, 1 September 2012
How can I invest in a foreign exchange market?
The foreign exchange market, also called the currency market or forex (FX), is the world's largest financial market, accounting for more than $4 trillion average traded value each day. Comprised of banks, commercial companies, central banks, investment firms, hedge funds and retail investors, the foreign exchange market allows participants to buy, sell, exchange and speculate on currencies. There are a number of ways to invest in the foreign exchange market, including:
Like all investments, investing in the foreign exchange market involves risk.
- Forex. The Forex market is a 24-hour cash (spot) market where currency pairs, such as the Euro/US dollar (EUR/USD) pair, are traded. Because currencies are traded in pairs, investors and traders are essentially betting that one currency will go up and the other will go down. The currencies are bought and sold according to the current price or exchange rate.
- Foreign currency futures. These are futures contracts on currencies, which are bought and sold based on a standard size and settlement date. The CME Group is the largest foreign currency futures market in the United States, and offers futures contracts on G10 currency pairs as well as emerging market currency pairs and e-micro products.
- Foreign currency options. Where futures contracts represent an obligation to either buy or sell a currency at a future date, foreign currency options give the option holder the right - but not the obligation - to buy or sell a fixed amount of a foreign currency at a specified price on or before a specified date in the future.
- Exchange-traded funds (ETFs) and exchange-traded notes (ETNs). A number of foreign currency exchange-traded products that provide exposure to foreign exchange markets are available. Some ETFs are single-currency, while others buy and manage a group of currencies.
- Certificates of Deposit (CDs). Foreign currency CDs are available on individual currencies or baskets of currencies and allow investors to earn interest at foreign rates. Everbank's "World Energy" basket CD, for example, offers exposure to four currencies from non-Middle Eastern energy-producing countries (Australian dollar, British pound, Canadian dollar and Norwegian krone).
- Foreign Bond Funds. These are mutual funds that invest in the bonds of foreign governments. Foreign bonds are typically denominated in the currency of the country of sale. If the value of the foreign currency rises relative to the investor's local currency, the earned interest will increase when it is converted.
Like all investments, investing in the foreign exchange market involves risk.
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