Markets are unstable and therefore investment in any market is subject to great volatility. It is in the best interest of the investor to maximize their interest while reducing risks to a minimum. To achieve their aim the investors nowadays are highly utilizing hedging methods and diversification techniques.
Conditions favoring different currencies may prove unfavorable for the stock indexes, commodities or bonds. Conversely, digging into a currency as a trader or an investor can prove to be daunting.
Now forex market can be easily understood with help of newly established currency electronic traded funds or simply ETF’s. Outlined below are some of the ways by which you can easily diversify your holdings.
Risk Hedging
To hedge against risk, every investor must have the know ledge of the risks involved. There in general two types of risk to which every investor is exposed, namely; idiosyncratic risk and systematic risk.
Falling price of the stock gives rise to idiosyncratic risk. In order to diversify such risk all you need to do is to diversify your portfolio across abroad range of stocks. This will eventually reduce your exposure to a particular stock.
Systematic risk is the exposure to the entire stock market falling. This causes accumulation of losses across your entire portfolio.
Now with the introduction of ETF’s you can now easily mitigate systematic risk also.
Management of ETFs
Buying and holding of currency is carried out by ETF management firms in a fund. The funds consist of shares which are then distributed to public.
ETF shares are similar to stock shares and are traded in the same way.
Valuation Of ETFs
ETF shares are valued hundred times more then the current exchange rate for the currency being held. You can use ETFs to profit from various currencies exchange rates.
Unlike the stock market, the currencies are very volatile. Value of the stocks is driven by economic and business growth. Trend may also cause movement in the value although.
On the opposite, issues’ surrounding monetary policy and inflation hinders the indefinite growth of the currency’s value.
It is worth noting that currency pair also trend, and fairly simple factors are involved which influence their value.
Commodities
An individual economy is represented by its currency. Commodity prices are influence currency values when an economy is both an exporter and importer of currency.
Three major currencies in the world are also regarded as commodity currencies. These currencies exhibit very strong correlations with commodities.
Interest Rates
The interest rates also play a role in the movement of currency prices. Majority of foreign exchange relationships are impacted by interest rates.
There is a dramatic correlation between bond yields and Swiss franc. The stock market is considered having a positive correlation with the bond yields. This relationship is very helpful in determination of new trading opportunities. They are also helpful in hedging against falling stock prices.
Conclusion
For an investor, who is focused on stocks the currencies ETFs have opened up the forex market for them, creating new opportunities. ETFs can be utilized in making short term profits. They also provide an additional opportunity for diversification.
