30 Currencies Including the G7, USD, CAD, EURO, GBP, JPY, R B Client needs t! "ns#er these $uesti!

ns% &' Is this " re"l c!()"n* !r +u*er "nd d! *!u ,n!# his n"(e "nd c!nt"ct in-!r("ti!n. /' D!es he h"0e -unds !n de)!sit re"d* t! e1ch"nge. 3' D!es he h"0e c!ntr!l !- the -unds. 2' Is he )re)"red t! )r!0ide PO3. 4' Is he re"d* t! tr"nche the ne1t +usiness d"*. Unless "ll "ns#ers "re *es there is n!thing t! discuss% 5e #ill n!t set u) the intr!ducti!n +ec"use it #ill +e " #"ste !- ti(e -!r e0er*!ne% 6he Re"l De"l 6he Pri0"te Currenc* E1ch"nge +"n, c!nsistent tr"c, rec!rd !- unc!()r!(ising ethics instills c!n-idence "nd trust% 5e use cutting edge techn!l!gies t! ensure u) t! the (inute in-!r("ti!n -r!( the -in"nci"l #!rld% 6his "ll!#s us t! res)!nd $uic,l*, "nd gi0e *!u the results *!u "nd *!ur )rinci)"l 7+u*er' desire% 5ith 38 Currencies including the G7 "nd !ur "+ilit* t! d! &/80 E1ch"nge C!(+in"ti!ns -!r *!u !r *!ur Client, #h* l!!, "n*#here else% Pr!cedures Our Pri0"te Currenc* E1ch"nge is si()le, 9ust underst"nd it d!es n!t ("tter #h"t currenc* *!ur Pr!0ider is l!!,ing -!r, the +u*er #ill (!0e -irst, "nd #e d!n:t d! 6&03 !r 67;;% 6h"t:s +r!,ers n!t ,n!#ing #h"t their d!ing% 6he* #ill !nl* d! B"n, S#i-t t! B"n, S#i-t !r Blue<Screen% 6he +u*er #ill sh!# c")"+ilit* t! d! -irst tr"nche !- 40 -!r u) t! 40+ !r 400( -!r l"rger th"n 40+% &% OUR E1ch"nge +"n, is " 3ed =icensed Pri0"te E1ch"nge B"n,% >O6E? I3 the BUYER is n!t 3ed A))r!0ed it #ill t",e " little l!nger -!r c!()leti!n !- this tr"ns"cti!n% Due Diligence #ill +e c!()leted $uic,l*% >!r("l )r!cess is less th"n " #ee, -r!( d!cu(ent su+(issi!n t! tr"nching@ Disc!unt? E"ch currenc* is di--erent "nd th"t in-! is +et#een the Bu*er "nd the E1ch"nge B"n, "nd +"sed !n the d"*s currenc* ("r,et% I- *!u h"0e re"d "ll !- this "re re"d* t! "ns#er "ll $uesti!ns, c!nt"ct (e P"ul Os+!rne 6ru P!#er 6echn!l!gies A!ust!n, 6B USA Y"h!! sg? COO=OD S,*)e ID? it<n!0" Ph!ne E3/</73<8E48

The closest most private investors get to foreign exchange dealing is when they buy their holiday money. Yet they could be missing out on some great profit-making opportunities. Foreign exchange (forex, or F ! is by far the biggest of the financial markets. "ccording to #nternational Financial $ervices, %ondon (#F$%!, in "pril average daily global turnover exceeded &'.(trn, over ten times the combined daily turnover of the world)s e*uity markets. (This is an extended version of a story that appeared in MoneyWeek issue 334.

See also: The MoneyWeek guide to Forex jargon and Paul odrigue!"s full re#o$$endations in What are the %est %ets in Forex no&'!

+urrency trading is undeniably riskier and faster moving than other markets. "s financial writer ,ugo -ixon says, some view it as the ultimate example of .casino capitalism in action/. 0ut there are plenty of advantages to knowing how the F market works. For a start, you can protect yourself against adverse currency movements 1 useful if your portfolio has exposure to overseas investments. "nd unlike parts of the e*uity and bond markets, trading is *uick, costs are low, and li*uidity (the ability to buy and sell when you want! is deep. #t)s also becoming more accessible to retail investors. The number of 23 brokers offering F dealing to private investors doubled last year and the rise of spread betting has made it easy to get involved. $o if you)re tempted to dabble in the world)s largest market, what do you need to know4

The basics of the forex market

A foreign exchange deal is 5ust two people swapping a fixed amount of one currency for another at an agreed price, the exchange rate. This can take place at today)s rate (known

as dealing 6spot)! or at a rate negotiated today, with the two currencies being exchanged at a future date (known as dealing 6forward)!. The latter is often used by firms looking to protect against currency movements before paying an overseas supplier or receiving cash from a foreign customer. 7ne key point to remember is that, unlike shares, bonds or commodities, the value of one currency is directly linked to the price of all the others. "s the FT puts it, the currency market is .relative rather than absolute/. #n a stockmarket bubble, shares can all rise together and everyone makes money8 but if the dollar rises, it does so at the expense of another, weaker currency. 9very winning up bet is matched by an e*ual losing down bet and vice versa8 F is a true :ero-sum game.

What determines exchange rates?

"s with anything else, the value of a currency is largely down to supply and demand. ;ore buyers than sellers for sterling will push up the exchange rate and vice versa. The tricky bit is deciding what)s actually causing people to buy and sell in the first place. +urrency markets are underpinned by the principle that money flows to where it can earn the highest return for the least risk. #f a country)s assets, such as shares and bonds, offer high rates of return for low risk, then people will demand that currency in order to invest there (most 2$ bonds have to be bought with 2$ dollars, 23 gilts with sterling and so on!. 7verall, a currency can be viewed as a bellwether for the economy)s health. "s a rule, a growing economy with stable prices and a wide range of competitive goods and services (such as the 23! will see more demand than one in political turmoil, with high inflation and few exports (such as <imbabwe!. =ight now, >? buys a lot of <imbabwean dollars.

Foreign exchange: what should you watch out for?

@olitical and economic events can have a huge impact on exchange rates, far more so than with e*uity markets, so it)s important to keep an eye on macroeconomic indicators. #nflation expectations are crucial. For example, if prices are expected to rise in the 23, then the 0ank of 9ngland is likely to have to raise interest rates in response. This makes the pound more attractive relative to other currencies, driving up the exchange rate. "lso watch the balance of payments8 this tells you whether a country is a global net provider (as it is when it has a surplus!, or a consumer (deficit! of goods and services. " large growing deficit and a weakening currency often go hand in hand. " 6cheap) 2$ dollar, for example, should help to correct the huge 2$ trade deficit by encouraging consumers to spend less on foreign goods and foreigners to spend more on 2$ ones. ;ore mundane decisions about how much currency to print also influence the money supply and in turn the exchange rate. 0roadly speaking, the larger the supply of notes and coins, the lower their value will be against a less abundant currency.

#f that all sounds a bit daunting, the good news, as trader Tom Tragett points out, is that once a forex trend is established it tends to last, as the fundamental drivers behind it can last months, or even years.

How to trade currencies

Trading the currencies themselves in spot deals is the first option. This won)t suit most small investors because of the relatively large minimum deal si:es (>AB,BBB is common!, but it)s a good way to demonstrate how trades work. %et)s say your broker *uotes a minimum deal si:e of >CB,BBB and an initial margin rate of AD. The initial deposit paid is B.BA x >CB,BBB, or >E,BBB. You think the pound will strengthen against the dollar. Your broker *uotes a F0@G2$- spread of '.B?BBG'.B?BA. You buy at '.B?BA. You are later proved correct when the rate rises and your broker *uotes a new F0@G2$- spread of '.B?(BG'.B?(A. #f you now close the position by selling at '.B?(B, the profit is B.BBCA, or CA 6ticks) ('.B?(B 1 '.B?BA!. Hith a deal si:e of >CB,BBB, this is a profit of B.BBCA x >CB,BBB or >EIB. That)s a ?ED profit on the initial margin of >E,BBB. 7f course, the rate could 5ust as easily have moved against you 1 and it)s vital to remember that when you trade on margin, relatively small exchange-rate movements can result in big profits or losses. Jot only that, but your losses are unlimited 1 if the rate moves far enough against you, you can lose far more than your initial deposit. The usual solution is to agree a stop loss with your broker, the best being the 6guaranteed stop). There will be a charge for this, but it ensures that your losses are always capped.

Spread betting
$pread betting works in almost exactly the same way, with one key difference 1 you don)t need vast sums of money to get started. "nother great feature of spread betting is that your gains are tax-free. The principle of spread betting is the same whether the bet concerns cricket scores or currency markets. The amount you win or lose depends on how many 6points) you are away from the spread-betting firm)s initial prediction (or 6spread)!. Hhen betting on a forex market, one point is e*ual to one pip, or tick (a B.BBB? movement in a currency rate!. @rofits or losses are settled at a fixed amount of, say, ABp or >? per point, depending on the spread-betting firm and si:e of the bet. The three largest markets, according to ;oney";, are euroGdollar, dollarGyen, and sterlingGdollar (referred to in the market as 6cable)!. %et)s say you expect the pound will gain (6strengthen)! against the dollar, so you buy (6go long)! the cable rate at ?.IKAB. You bet >? per point that the pound will continue to strengthen against the dollar. 0y the end of the day, the rate has increased to ?.IIAB 1 a ?BB points rise. "t >? a point, this would have made you a >?BB profit. 0ut e*ually, a drop to ?.I(AB would have resulted in a >?BB loss and, as with the above example, you can lose far more than your initial stake, so it)s

vital to have a stop-loss in place. You can hold your position for as long as you like 1 if a trade expires at the end of the day it can be rolled over. 0efore placing the bet, the spread-betting firm will ask for a deposit. This is usually a multiple of the agreed stake per point (sometime referred to as a 6notional trading re*uirement), or JT=!. The more volatile the currency being traded, the higher the JT=. #f you were betting >? a point, with an JT= of 'AB (the range on ma5or currency pairs with +antor #ndex is anywhere between ?AB and ABB!, then the initial deposit is >'AB. 9xtra online-only contentL

ontracts for difference ! F"s#

+F-s are very similar to spread bets 1 indeed, Jeil -aldy of 9MTrade says .they are essentially the same product/. You pay or receive the difference between the exchange rate for the nominated currency pair when the bet is opened and the rate prevailing when the bet is closed. 7nce again trading is margin based. The key differences are that +F-s attract capital gains tax and margin re*uirements tend to be higher due to the larger average contract si:es. "lthough bid and offer spreads used to be significantly tighter for +F-s, with the emergence of more and more spread betting brokers this is no longer a ma5or benefit. "t the moment currency +F-s can only be accessed in the traditional way, .over the counter/ - in effect a deal directly between you and a bank or broker. This is set to change later this year with the arrival of currency +F-s listed on the %ondon $tock 9xchange. The main advantages will be the ability to trade through any broker, not necessarily a specialist, improved transparency (since the contract will have a *uoted price! and guaranteed stop losses.

o$ered warrants
#f the thought of losing *uite large sums *uickly, or having to negotiate expensive stop losses is off-putting, then covered warrants for currencies are available on the %ondon $tock 9xchange as an alternative, although the market is fairly small. These products allow you to take a view on a currency strengthening or weakening in relation to a fixed .strike/ price by a specified date ($ociete Fenerale)s 'BB( contracts expire on ?A Nune or '? -ecember!. $o if you think that sterling might appreciate short term against the dollar you could buy a F0@G2$- call (5argon for .the right to buy/! warrant expiring in Nune. 9*ually if you believe sterling will fall or weaken then you would buy the .put/ (.right to sell/!. The main potential advantage of warrants over spread bets only becomes apparent if you get the currency direction wrong. =ather than facing unlimited losses, the warrant expires and you .5ust/ lose the up front premium (though that)s still ?BBD of your initial investmentO!.

%xchange traded funds !%TFs#

For those investors who feel uncomfortable with derivatives there is now another way to trade currencies, the exchange traded fund. "lso known as currency shares, the FT reckons that these Jew York $tock 9xchangelisted securities are a li*uid and cheap way to track the movements of eight currencies against the 2$ dollar, those being8 the 9uro, Yen, $terling, $wiss Franc, ;exican @eso, $wedish 3rona, "ustralian and +anadian -ollars. %ike other 9TFs there is no stamp duty on purchase and, unlike spread bets, an open position can be maintained without the expense of having to roll it over beyond a fixed expiry or delivery date. ,owever, being a share, any profits attract capital gains tax and the gains themselves are in 2$ dollars, which is not ideal for 23 investors. The basic mechanics are straightforward enough8 if you think that the 9uro will strengthen against the 2$ dollar you could buy the euro currency share (via a 2$ broker like +harles $chwab!. "s the 9uro strengthens the share price rises until the 9TF is sold realising a gain net of any spread. Those investors tempted to participate in a version of the much publicised .carry trade/ (whereby hedge funds, for example, borrow in a low yield currency to invest in another typically with a much higher interest rate and pocket the difference! can also now do so. The &owershares urrency Har$est Fund (";9 L-0P! tracks an index that goes long of the F?B currencies with the highest interest rates and simultaneously short those with the lowest. 7ver the last ?B years returns have averaged ??.?D versus 5ust K.Q' for the $R@ ABB.

Forex trading: Where to start

The key to successful forex trading, as @hilip 0attley of ;oney"; puts it, is .practice, practice, practice/. ;ost spread-betting firms offer demonstration accounts that let you hone your skills before trading for real, including +;+ ;arkets and +apital $preads. $tick initially to the commonly traded currency pairs, such as 2$-GN@Y, 92=G2$- and F0@G2$- 1 it)s generally easier to keep an eye on the news flow that might affect these rates. "nd one thing we can)t emphasise enoughL make sure you protect yourself with a stop-loss.