Currency Cycles ó Balancing Risk and Reward
....continued from Part One
As the global economic crisis worsened, the USD actually benefited
against many of the major currencies. As of December 26, 2008, the USD
has gained value against the CAD, AUD, and GBP. I will use acronyms for
these currencies, the CAG currencies (Current Annualized Growth). The
USD has only declined against the two safe-haven status currencies, the
JPY and Swiss franc (Just Stabile).
The currencies that anticipated higher growth for this time of year have suffered. At the beginning of 2008, CAB currencies expected signiicantly more growth than the JS currencies. As a result of the global economic crisis, ìJSî currencies have outperformed
the ìCABî currencies in 2008 relative to the USD.
ISE FX Options allow investors to make their own foreign exchange forecasts using exchange-listed options. The ISE FX Options are intuitive; all of the pair values are U.S. dollar relative. If you are predicting a USD rally, you could simply buy call options to implement your forecast.
Conversely, if you thought the USD is going to decline, you would buy put options. The options can be accessed directly from your equity options broker with expirations up to ten months in length. More sophisticated multi-leg options
strategies can be implemented creating your own unique risk and reward
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What To Expect?
As we move through 2009, what can investors expect? How much uncertainty? When will the markets finally ìshiftî direction? Only time will tell. No market guru can predict with 100% certainty how the markets are going to perform over the next year. FX Options are available each trading day for retail investors, institutions and market makers. As an investor, itís important to carefully monitor the risk and reward relationship on a daily basis to ind the appropriate trades for your portfolios.
Trends do reverse. In any potential trade, the key consideration is whether the
risk is worth the reward. As markets move through the various ìlife cycleî stages of consolidation, breakout, equilibrium and the reversal of the previous breakout, human emotion will continue to play its part.
Although itís not always easy to define, the market stages are a good complement to other key indicators when trading the currency markets. Monetary policy, fiscal policy, balance of trade, inlation, economic growth, and political conditions are just some of the factors that help price the currency market. New market data
is relected daily on the ISE pair values and option premiums, as measured by the option implied volatility. Human emotions can be managed through ISE FX Options.
Understanding how currency fluctuations impact your portfolio is vitally important. The FX options market allows investors to implement simple FX forecasts with limited risk by purchasing calls or puts, hedging a particular currency risk relative to the U.S dollar,
or creating unique option payoffs by implementing multiple leg options strategies.
Whether you monitor the technical stages of the currency market, analyze the monetary or fiscal policies or use other methodology, FX options can help you meet your financial goals.
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