Currency exchange is the second vehicle in the futures market. Also referred to as foreign exchange, it provides a means for trading one currency against another at a set price or exchange rate. an investor who thinks the price of the euro will appreciate, for example, may buy a euro currency future using today’s dollars. Businesses often use this strategy to hedge risk; individuals generally use the strategy as a hedge or to speculate.
Unlike other markets, the currency market has no physical location or centralized exchange--rather, participants transact business via distribution networks. with dealers in every major time zone, it is a 24-hour-a-day, five-day-a-week market. Trading is set into motion on Monday morning in Sydney and then continues through the various global trading centers until the market closes in New York.
For investors looking to complement their U.S. holdings, currency futures may be an attractive way to gain additional noncorrelated exposure to international markets.
Benefits
Risks
Historically negative correlation with foreign equities, resulting in a potentially more diversified and less risky portfolio
Currency risk—investments in a foreign currency may fluctuate in value over short periods of time due to changes in interest rates, political developments abroad, etc.
Intra-day volatility (due to large volume and liquidity) provides opportunity to profit
Intra-day volatility also increases risk
Hedges against devaluation and the "twin deficits"—high U.S. deficits in trade and the federal budget
Can result in losses if prices do not move in a favorable direction with your current position
Potential to hedge against commodity price movements
Investing in a single currency is more volatile than investing in a broadly diversified product
High liquidity because of the market’s high volume
Potential loss of more than the original investment (due to the use of buying on margin)
Opportunity to take advantage of changing conditions in other economies
Investing in Currencies
Once a time-consuming proposition for individual investors, investing in currencies today is easier because of the methods below¹:
Open a managed futures account with a financial advisor
Trade currency index products
Invest in a currency product
¹ Each of the options listed here has its own risks, which an investor should review carefully with their financial advisor prior to making any investment decision.
This educational piece is not intended to be comprehensive. Before investing in managed futures, be sure to discuss them with your financial advisor to make sure they are appropriate for your time horizon, risk tolerance and objectives. Investors should be aware that there are risks, special costs and requirements associated with financial futures and that they may not be appropriate for all investors. When owning futures, investors should consider the impact and risk of maintaining a margin account. Margin is defined as borrowing money from a broker/dealer to purchase securities. It is sometimes called “buying on margin.” Should an adverse price movement affect your securities, a margin call will be issued, which demands additional investment to cover the loss. Failure to meet a margin call can result in losing more than your original investment. Futures should be regarded as short-term trading vehicles and should be regarded as inappropriate for anyone who is unable or unwilling on short notice to access other financial assets in order to meet margin calls on open futures positions.
The information provided here is intended to be general in nature and should not be construed as investment advice or a recommendation of any specific security or strategy.
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
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