FOREX Profiting Strategies

FOREX Profiting Strategies
SCALED-IN SELLING FOREX PROFITING
This is a very easy strategy, and it is also particularly successful. It nor­mally involves the estimation of a range that the relevant currency will trade in over the period of the exposure.
When an importer needs to purchase U.S. dollars, he or she would seek to buy the dollars when the EUR/USD exchange rate is at its highest. Assume that the current exchange rate is 0.6300 and that it is felt that the EUR/USD is really to trade at between 0.6250 and 0.6600 during the life of the exposure. In this case the importer would set up a strategy such as shown here:

• At 0.6400, purchase 20 % of requirements.
  
• At 0.6450, purchase 20 % of requirements.
  
• At 0.6500, purchase 20 % of requirements.
  
• At 0.6550, purchase 20 % of requirements.
  
• At 0.6600, purchase 20 % of requirements.
  

In this way, an average rate of 0.6500 is achieved instead of the pre­vailing spot rate of 0.6300. However, if the view turns out to be incorrect, then the worst-case trigger is touched, and the exposure is covered at 0.6245, just outside the expected range. This is only 55 pips worse than covering at the then-spot rate. If the best case is achieved, then you have done better by 200 pips.

FOREX Profiting Strategies
TAKING OUT "INSURANCE' for MAXIMUM PROFITS FROM FOREX
This type of strategy employs FOREX profiting options, which are widely used products. Let's look at the case of a corporation that suffers when the EUR loses value. If that corporation were to buy an option that would pro­tect it from downward movements in the EUR but still left it with the opportunity to benefit if the EUR were to gain strength, then this would appear to be a good, safe strategy, and in fact, it is.
Options are just like insurance. They protect against worst-case scenar­ios while still leaving room to benefit when things are favorable.



FOREX Profiting Strategies
WORKING AN EXPOSURE IN FOREX
This is a fairly aggressive strategy in which a business unit hedges and non-hedges the exposure to take advantage of a market that is range trading and seems to have no real direction. For example, if the business unit hedges the exposure at 0.6500 and the EUR/USD rate subsequently falls to 0. 6300, the business unit could take a profit of 200 pips.

Assuming that the rates were just range trading and went back up, the business unit could put on the hedge again at 0.6500, and because of the 200-pip profit, it achieves an average rate of 0.6700. This may happen a number of times, and extraordinarily effective rates of exchange maybe achieved.
It sounds risky, but a worst-case plan can easily guard against the situ­ation where the EUR starts to depreciate rapidly. For example, the exposure is fully covered if it breaks lower than 0.6250. At this time the corporate may already have 400 pips up its sleeve.

The number of different strategies available is only limited by the imag­ination and the skill of the planner. It is not difficult to formulate these strate­gies with the right advice, and it is certainly not difficult to implement them for maximum profiting from FOREX.

FOREX Profiting Strategies
PORTFOLIO MANAGEMENT AND CURRENCY RISK with profiting from FOREX
Fund managers have different FOREX requirements than corpo­rations because profiting from FOREX exposures occur as a result of investment activities as opposed to trade activities. Fund managers are often working within a benchmarked framework, and managing FOREX risks incorrectly can give rise to unwanted and unexpected deviation on returns, even when they are trying to stay at benchmark.

Fund managers should be aware of not only the benchmarks set for them but also how to manage to the benchmark return. This is often more complex than may first appear because benchmark indices are set periodically, and fund size changes can affect the currency weighting in unex­pected ways.

FOREX Profiting Strategies
FULLY HEDGED PORTFOLIOS for good profiting from FOREX
Most fund managers run international bond portfolios fully hedged, which means that for every foreign bond exposure, they have a corre­sponding hedge in place. Usually the hedge takes the form of a forward sale of FOREX for, say, Australian dollars normally on a rolling 3-month basis.

In practical terms, this means that on purchasing a foreign bond, the fund manager should enter a swap or forward (FX) contract. This means that on the near leg of the swap, the manager can buy the FOREX against EUR (to pay for the bond), and the second leg is for the sale of the FOREX against the EUR and neutralizes the forward risk.

An example would be a fund manager executing a spot to buy the FOREX and then an outright deal to sell the FOREX for­ward. The net effect is the same as a swap, except that the fund pays an unnecessary spread in the spot market.

FOREX Profiting Strategies
Once the hedges are due for settlement, the fund simply executes another swap. The near leg is equal and opposite to the maturing deals (except that the rate is now the current spot), and the second leg reinstates the forward hedge.

The portfolio manager also needs to decide which currency to keep constant—Australian dollars or the FOREX. In general, it is the FOREX that should be kept constant in line with the value of the bond holdings.
If the FOREX hedge amount is kept constant, be aware that each roll date will give rise to a EUR profit or loss on the hedge. Also, at each roll date the value of the foreign bond needs to be taken into account and the hedge adjusted accordingly to make sure that the portfolio is not over- or underhedged.

FOREX Profiting Strategies
NONHEDGED PORTFOLIOS IN FOREX
When a fund manager is running a portfolio non-hedged, then FOREX should be bought and sold as needed to satisfy the underlying trans­action. These transactions should be executed when the underlying assets are purchased or sold and have value dates matching the settlement terms of the underlying asset.