The foreign exchange market is the largest financial market in the world, representing more than 5 trillion dollars in turnover every day. Comprised of banks, trading companies, central banks, investment firms, hedge funds, and retail investors, the forex market allows participants to buy, sell, trade, and speculate on currencies. There are several ways to invest in the forex market.
The foreign exchange market is a 24-hour cash (cash) market where currency pairs, such as the EUR/USD pair, are traded. Because currencies are traded in pairs, investors and traders are betting that one currency will go up and the other will go down. Currencies are bought and sold based on the current price or exchange rate.
Foreign Currency Futures
Currency futures are forward currency contracts, which are bought and sold based on a standard size and settlement date. The CME Group is the largest currency futures exchange in the United States and offers G10 futures as well as emerging market currency pairs and e-micro products.
Foreign currency options
While futures contracts represent an obligation to buy or sell a currency at a future date, currency options give the option holder the right (but not the obligation) to buy or sell an amount fixed price of a foreign currency at a specified price on or before a specified future date.
ETFs and ETNs
A number of exchange-traded funds (ETFs) and exchange-traded notes (ETNs) provide exposure to the foreign exchange markets. Some ETFs are single currency, while others buy and manage a group of currencies.
Certificates of deposit
Foreign currency certificates of deposit (CDs) are available on individual currencies or baskets of currencies and allow investors to earn interest at foreign rates. For example, TIAA Bank offers the New World Energy CD Basket, which offers exposure to three currencies of non-Middle Eastern energy-producing countries (Australian dollar, Canadian dollar and Norwegian krone).
Foreign bond funds
Foreign bond funds are mutual funds that invest in foreign government bonds. Foreign bonds are generally denominated in the currency of the country of sale. If the value of the foreign currency increases against the investor’s local currency, the interest earned will increase upon conversion.