Reach Forex Here

TRADING CURRENCY STOCKS?
Foreign currency trading is not just for gamblers or hungover commodity
traders. It really has become a respected asset classification and is extremely
popular with professionally managed trading entities and hedge
funds. Foreign currency is so hot that major players are taking it to the extreme.
How so? Well, there is now what is called exchange traded funds
(ETFs) on foreign currencies. The first to be introduced was the Euro Currency
Trust (FXE). On the first day of trading, the Euro Currency Trust had
over 600,000 shares trading hands.
Advantages and Disadvantages
As with any product, there are advantages and disadvantages to ETFs. One
is that this vehicle has an annual expense of 0.4 percent of assets. If that
amount is not enough (the interest rate is below the 0.4 percent expense
ratio), then the sponsor can withdraw deposited euros as needed, which
could diminish the amount of euros each ETF share represents. The currency
ETFs are linked to the spot price versus the U.S. dollar. The obvious
strategy to make money in these vehicles is to see the value move in the desired
trade direction (you can buy and sell short) and to cover the interest
charge less the trust expenses.
The benefactor or the depository for the ETF is JP Morgan Chase Bank.
This product is structured as a grantor trust, and Bank of New York is the
trustee. Here is how JP Morgan will make money: It will maintain two eurodenominated
accounts in London, a primary account that will earn interest
and a secondary account that will not earn interest. JP Morgan will not be
paid a fee for its services to the ETF. It will instead generate an income or
accept the risk of loss based on its ability to earn a spread on the interest it
pays to the trust by using the trust’s euro position to make loans in other
banking situations. To be sure, JP Morgan has an advantage of floating
money, so I would not worry that it will put itself in a position of extreme
risk. As it has control over granting lending rates, I do not think that anyone
will expect that the trust will pay the best available interest rate back to the
The Business of Trading Money 27
ETF so it will lock in a profit. The bank is in the business of making money.
The best feature for individual investors for using an ETF is that it allows
one to accumulate exposure without excessive leverage in the euro currency
for a long-term position play. It can also be used as another means to
hedge forex transactions. Each share of the ETF will represent 100 euros
plus accrued interest. Under the guidelines of an ETF, it is acceptable to
trade the short side without the uptick rule. Also, ETFs are listed on exchanges
and trade throughout the day like individual securities. Since it is
a tradable vehicle, unlike the forex market, it does charge a commission,
which needs to be paid to a brokerage firm, to buy or to sell ETF shares.
Downside Risk
One of the downside risks to U.S. shareholders is that these ETFs are not
insured by the Federal Deposit Insurance Corporation (FDIC), according to
documents filed with the Securities and Exchange Commission (SEC).
Also, interest on the primary account accrues daily, with rates based on the
most recent Euro Overnight Index Average (EONIA), minus 0.27 percent
that is paid monthly. The rate can change over time, according to the
prospectus from Rydex; so there is no fixed rate or cost. This is a minor
consideration; but for a large hedge fund, this could make a difference to an
individual investor looking to take advantage of a long-term investment
play. I hardly think this will cause a major change in the value of the investment.
For the record, the ETF’s net asset value (NAV) is based on the Federal
Reserve Bank of New York noon buying rate and expressed in U.S. dollars.
And as you can imagine, the true influence on the value of this product is
the same group of variables that affect the spot currency markets. Therefore,
I believe that combining traditional technical analysis with the futures
data, such as the Commitments of Traders Report, Volume and Open Interest
studies, can greatly enhance the performance of longer-term investors
over time. In June 2006, Rydex released six additional curency
ETFs. So if you want to hedge or speculate that the U.S. dollar is strengthening
or weakening against major foreign currencies and like the idea and
concept of ETFs, now there is a pretty good inventory of product to choose
from. The new currency ETFs trade on the New York Stock Exchange
(NYSE) uner the symbols shown in Table 1.4.
To summarize, each unit represents 100 shares. You can sell short without
the uptick rule that exists in stocks. ETFs allow a longer-term trader
with limited risk capital to participate in an opportunity against the U.S.
dollar versus major currency markets. Trading hours are during the U.S. equity
markets’ session—9:30 A.M. (EST) until 4:00 P.M. (EST). If you want to
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read more on the subject of currency ETFs, especially about the risks,
charges, and expenses on these products visit www.rydexfunds.com.