Wednesday, 9 September 2015

Currency plays - Foreign Currency Deposit, Foreign Exchange Futures and Currency Warrants.

Foreign Currency Deposit

The easiest way to invest in foreign exchange (FX) is to switch your Ringgit dollar deposit for a foreign currency deposit.

FX futures or leveraged FX

To capture short term movements, some investors may choose to invest in FX futures or leveraged FX products.  (However, foreign exchange spreads charged by banks vary from one to another.  Besides, for futures trading, investors are required to open a futures account.  There is also the risk of margin calls.  This is obviously not every investor's cup of tea.)

Currency Warrants

The trading mechanism of Currency Warrants is much the same as other warrants.  Investors only have to pick a suitable warrant in terms of price and maturity, as well as implied volatility, which should be relatively low as compared with others with similar terms.

Foreign exchange is a relative game.  For a Currency Warrant, investors must always make sure which one in the currency pair is the positive play and which on the negative play.

Additional notes:

Compared with other investment instruments, Currency Warrants are more flexible.  They can give a higher potential return without the risk of margin calls in futures trading.  So, they are suitable for investors who want to profit from foreign exchange, but have relatively low tolerance for high risks.

Currency Warrants have limited downside, but unlimited upside.  So, if one gets the market wrong and is wise enough to stop loss, the loss will be just a portion of the capital  Yet, no matter how small the investment amount is, one should always stop loss if one gets the market wrong.

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