How can I invest in a foreign exchange market?

By Jean Folger AAA
A:

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:

  • 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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