It can hardly have escaped notice that after the Global Financial Crisis, one of the unifying themes that have connected the financial markets of the world is the currency markets. Since 2008, currency markets have expressed their disapproval of a credit crisis, they have expressed vehement disapproval of governments, and they have pointed to the profound challenges the global economy has to overcome in order to recover to a healthy balance.
As is often the case, the currency markets are no less exclusive than other financial markets. Currency markets are particularly exclusive as they operate within tiers defined by the capacity of market participants. So dynamic and erratic are currency fluctuations that volume trades with volume; large traders only deal with others of similar size – there simply isn’t time to consider multiple smaller parcels. This volatile market has now become a refuge for the small investor who simply can’t compete in the tiered international currency market.
Exchange Traded Funds (ETFs) are funds that invest in particular assets. Currency ETFs invest in certain currencies. With risk attributed to a particular currency, as the value of the currency fluctuates, so does the value of the fund. For private investors with smaller amounts of risk capital to that of international participants, currency ETFs offer a viable and accessible trading opportunity.
In pure currency trading in international markets, the cost of holding a particular currency is measured by the opportunity loss of holding another currency. In this manner a bullish view in one currency can be expressed by purchasing that currency or alternatively divesting oneself of investment in the currency that is strongly aligned against, such as that of a major trading partner. Due to the fact that currency ETFs offer an isolated investment in one currency, currency ETFs themselves, and options on currency ETF’s can be a useful hedge against an open market currency position.
Currency markets operate on a plethora of variables not the least of which are political, fundamental and technical. Numerous strategies are employed to exploit value in currency markets but given the liquidity, depth and maturity of the market, pure arbitrage is rarely possible due to market efficiency. Still, currencies offer other types of theoretical edge for the astute trader, and interest rate swaps, future and options in various currency denominations can provide value trading opportunities that exploit economic fundamentals, political climates and technical indicators. The currency ETF option market, even more so than that its underlying ETF currency allows flexibility and leverage to the trader that simply desires to capture value in broader currency asset strategies.