Currency Substitution can be an official or ad hoc occurrence in a country whose commerce is partially, or fully, conducted using the currency of another country. Some currencies which are pegged to another currency at a fixed rate (especially at whole integers) are domestically exchanged in the same manner that the local currency is. Many countries have completely adopted the currency of another country, and do not have a central bank of their own. Continue reading...
Fixed income funds may not be used for income at all, but are relatively safe investments that primarily consist of dividend-paying bonds. Fixed income funds, also known as bond funds, invest primarily in bonds, but might also include some preferred stock, which pays regular dividends and behaves much like debt instruments. In fact, there are also Preferred Stock Funds and ETFs that fit into this category. Continue reading...
Fixed annuities, generally speaking, are annuity products that give the purchaser of the annuity the guarantee of fixed income payments for life. Annuities must come with the option to be paid out in equal payments either over a certain number of years or the lifetime(s) of the annuitant(s). This is the case for variable and fixed annuities, and these payments will be fixed and guaranteed. Where they differ is how they are invested before any annuitization takes place. Continue reading...
These are generally referred to as currency swaps or cross-currency swaps , since “foreign” is a little redundant (currencies are from different countries anyway). Central banks and large institutions sometimes swap principal amounts and loan interest in their domestic currency in exchange for a foreign currency, to provide liquidity and a hedge. Currency swaps are where banking institutions, particularly central banks, exchange a loan in one currency for a loan in another currency. Continue reading...
A fixed income security is one designed to pay interest/coupon payments on a predetermined basis, or a fixed schedule. Fixed income securities are often used by late stage retirees who need safe, reliable income streams. Fixed income securities still have risk, such as interest rate risk where if interest rates rise the price of a fixed income security can fall. Examples of fixed income securities are U.S. Treasuries, municipal bonds, or CDs. Because fixed income products carry relatively low risk, it generally translates into relatively lower returns. Continue reading...
There are six major currencies traded and used as benchmarks on Forex markets: United States Dollars, Euros, Yen, British Pounds, Australian Dollars, Canadian Dollars, and Swiss Francs. There are also relationships between these and others, known as currency correlations. Currency exchange rates can be fixed or floating, and this is determined by policy within the country and how they want to value their money. Continue reading...
Currency baskets are composed of weighted amounts of certain currencies. The most common use of a currency basket is as a benchmark for certain economic analysis, but it can also be used as a unit of account where an international organization has constituents that use various currencies. A basket of currencies is a weighted index of various currencies which serves a specific purpose as a benchmark or as a unit of account. Continue reading...
Currency futures are derivative contracts that trade on regulated exchanges around the world. Like forward contracts, they name a specific amount of one currency which is to be exchanged for a specific amount of another currency at a future date. Futures name a specific amount of one currency which will be exchanged for a specific amount of another currency at a future date. Like other derivative contracts that trade on exchanges (e.g., options), futures are transferable and are traded as the market calls for up until their expiration. Investors can short them (sell to open) and hold them long (buy to open), and can close their positions as they see fit without riding out the contract to the expiration date. Continue reading...
Currency symbols are characters written or typed in a specific arrangement alongside the numerical values of a currency amount, to denote the kind of currency in which the amount of money is held. An example would be the dollar sign ($), which is placed at the beginning of the numbers which describe the amount of currency in question, despite the fact that in most languages the word “dollars” follows the numbers when spoken. Many currencies have their own symbol but not necessarily all do. Continue reading...
Forex is the common name for the Foreign Exchange market, an international network of currency trading that is active 24/7. Forex is by far the most active and highest-volume market in the world, because it involves large trades between international institutions in an effort to diversify or consolidate their exposure to various currencies. Individual traders can also participate, usually by trading nano-lots, which are 100-unit increments of currency. Continue reading...
Assets that are held are sometimes analyzed in terms of the cost of carrying them, called the cost of carry. In certain situations, there may be a potential for profit if an asset that might otherwise have a cost of carry could be traded for an asset that actually generates profit. The arbitrage opportunity that exists in that space, and the market formed by it, is sometimes called the carry trade, or the currency carry trade where it applies to currency. Continue reading...
The value of a currency can depreciate in relation to the value of other currencies or to another benchmark. Currencies can have their value determined by the cost of a basket of consumer goods from one period to another, but this is really just a measure of inflation. Inflation (or “deflation”) is a subset of the appreciation/depreciation metric, but changes in the exchange rates between currencies are typically seen as the most relevant measure of a currency’s value. Continue reading...
In a currency swap, institutions will enter into an arrangement lasting anywhere from 1 to 30 years, in which they loan each other an equal principal amount at the current exchange rate, lending out their currency and taking a loan in a foreign currency, and paying an interest rate in foreign currency to their lending counter-party. Institutions that engage in a currency swap (also called a cross-currency swap) seek to increase their exposure or liquidity in a foreign currency, and in some cases seek to take advantage of favorable interest rates in the arrangement. In fact, a currency swap can be considered a variation on an interest rate swap, except that in this case, a notional principal is exchanged at the onset. Continue reading...
The currency pairs you are most familiar with, such as EUR/USD or USD/JPY, are floating currencies, meaning that their value changes freely with market forces. Some countries have chosen to peg their currency to another currency, most commonly the USD. The exchange rate between their currency and the peg currency never changes, unless policy makers tweak things slightly. Currencies can also be pegged to commodities or baskets of other currencies. Pegged currencies are not discussed often in the Forex market because their value is tied directly to the value of another, more liquid floating currency, or to a basket of currencies, or to a commodity. Continue reading...
Currency in circulation tends to be defined as the currency held by commercial banks, and currency with the public, without including long-term deposits or investments. As much as 2/3rd of Currency in Circulation is held outside of the borders of the US, and is estimated to be around $1.5 trillion as of 2016. Currency in Circulation is one part of what’s known as the money supply. Money supply is divided into four levels: M0, M1, M2, and M3. Some might define currency in circulation as the larger part of M0, which is the money base, constituted by the currency held in commercial banking institutions and excluding central bank reserves / Federal funds. This definition disregards the Currency with Public, which is included in other definitions and is part of M1. Continue reading...
Currency exchange rates are discussed in terms of currency pairs, where you say how much of a given currency it would take to equal one unit of another currency. The single-unit currency is the “base” currency in the pair, and it appears as the second currency or denominator in the comparison. The base currency is always implied to be 1 unit, so only the value of the other currency in the pair is stated in the exchange rate quote. Continue reading...
Countries, investors, and international businesses have to frequently assess currency risk, which is the chance that exchange rates will change unfavorably at inopportune times. An investment in a foreign security or company, or income payments coming from foreign sources, can be at risk for exchange rate changes. If an investor or company has financial interests which are based in another currency, or if the investor engages in Forex trading, currency risk looms over the future value of the holdings, on top of any typical market risk. Continue reading...
The U.S. dollar is the world’s reserve currency, so generally speaking, if you are not planning to travel to foreign countries or do not have the need for foreign currencies in your business, you might as well stay with U.S. dollars. If you are using foreign currencies in your investment portfolio, you must be prepared for volatility and continue to educate yourself on the Forex market as well as international trade. The famous example of George Soros, who almost destroyed the Bank of England, and made a couple of billion dollars along the way, might not necessarily be applicable to you. Continue reading...
A Foreign Exchange (FX) Swap is a short-term arrangement where a company or institution swaps domestic currency for another, then swaps it back after a short time - this may involve the use of a Forward contract. If a company sells something internationally, and they now hold a significant amount of foreign currency, they may want to exchange it for their domestic currency. If, however, they already have a payment obligation in the foreign currency within the next few months, they may use an FX Swap arrangement. Continue reading...
Currency arbitrage is when the value of a triangle of currency pairs does not cross-correlate, and a bank or large institution is able to exploit the temporary discrepancy for a profit before the market equalizes again. Arbitrage is when an investor (usually an institutional investor) can pick up something in one market that has a higher value in another market, perhaps due to lower liquidity or information flow in the secondary market, and can move goods or securities across these markets and make a profit. Continue reading...