Options for Trading Currency
The idea behind currency trading and speculation is a rather simple one: currencies, specifically the six global currencies (though now, there are ten, listed below) are constantly going up and down in value given the host country's economic fortunes. For example, investing in the Chinese yuan against the dollar will lead to large profits if the value of the dollar sinks. In this case, trading currencies is similar to trading stocks.The currency is not merely a means of exchange, but (all other things being equal) is a signal on the health of the local economy.
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Currency Option
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The "currency option" approach stresses its limited risk potential. It only works within six major currencies, and money can be made quickly with this option. The risk is only assumed on one's initial investment rather than on one's credit. The real mark of the currency option is that one can buy currency without limit or restriction over a specific period of time. This is the simplest of all currency trading options.
Multi-Currency Deposits (MCDs)
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MCDs also seek to minimize risk. Here, small investors can spread out their investment over many currencies. A single savings account can bring access to numerous currencies at once, again stressing diversification to minimize risk. HSBC Bank, for instance, offers a single account where one has investment access to ten currencies: the dollar, the yuan, the Hong Kong pound, the yen, the Swiss franc, the Canadian dollar, the euro, the Singapore dollar, the Australian dollar and the sterling pound. A small investor can take advantage of minimizing risk by hedging his bets within all ten of these major currencies.
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Currency Futures
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Currency futures are the maximal risk investment in currency markets. It is a fast moving, high energy market where the most sophisticated techniques are necessary to predict and follow currency movements, This is a high-yield structure that serves only the most powerful and experienced of traders.
Exchange-Traded Notes (ETNs)
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ETNs are one of the newer and more popular of the currency trading options. They are relatively high risk, but have a short life span, and hence, money can be won or lost quickly. Unlike the currency options or MCDs, these present not just a risk on principal, but on credit as well since they are based on pre-paid contracts, hence limiting mobility and diversification. Only a handful of banks, led by Barclay's, issue these. In essence, these are debt bonds backed by banks.
Exchange-Traded Funds (ETFs)
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The main competition to ETNs are ETFs. There is no need for any special currency trading account; currencies are traded like any other stock. Gains and losses are regularly rolled over into new investments, hence minimizing risk but also returns. ETFs, like hedge funds, are also professionally managed and there is no credit risk as with ETNs. These investments usually charge lower fees. There is a substantial debate within the financial community about which investment makes the most sense, but it seems clear that it is the type of investor, rather than the investment itself, that matters here. Conservative investors normally go for ETFs or currency options, while "high rollers" usually go for futures and ETNs.
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- Photo Credit Image by Flickr.com, courtesy of sarah n
