How to invest in a currency increasing in value relative to another?

Question

I would like to make a mid to long term investment in a currency that i think will rise. The NOK is currently very low due to low oil prices, and i would like to invest in it rising, as it seams undervalued and about to rise... How would i do this? I know forex trades, but they seam short term (days/weeks instead of years) I am thinkng a time period of about 5 years. The easiest would be to simply buy the currency using another foreign currency like usd or euro, but i only have NOK already, and so there is no other currencies for me to use. Is there a trusted currency exchange company similare to stock borkers? thanks.

Answer 1

What you're looking for are either FX Forwards or FX Futures. These products are traded differently but they are basically the same thing -- agreements to deliver currency at a defined exchange rate at a future time.

Almost every large venue or bank will transact forwards, when the counterparty (you or your broker) has sufficient trust and credit for the settlement risk, but the typical duration is less than a year though some will do a single-digit multi-year forward on a custom basis. Then again, all forwards are considered custom contracts. You'll also need to know that forwards are done on currency pairs, so you'll need to pick the currency to pair your NOK against. Most likely you'll want EUR/NOK simply for the larger liquidity of that pair over other possible pairs. A quote on a forward will usually just be known by the standard currency pair ticker with a settlement date different from spot. E.g. "EUR/NOK 12M" for the 12 month settlement.

Futures, on the other hand, are exchange traded and more standardized. The vast majority through the CME (Chicago Mercantile Exchange). Your broker will need access to one of these exchanges and you simply need to "qualify" for futures trading (process depends on your broker). Futures generally have highest liquidity for the next "IMM" expiration (quarterly expiration on well known standard dates), but I believe they're defined for more years out than forwards. At one FX desk I've knowledge of, they had 6 years worth of quarterly expirations in their system at any one time. Futures are generally known by a ticker composed of a "globex" or "cme" code for the currency concatenated with another code representing the expiration. For example, "NOKH6" is 'NOK' for Norwegian Krone, 'H' for March, and '6' for the nearest future date's year that ends in '6' (i.e. 2016). Note that you'll be legally liable to deliver the contracted size of Krone if you hold through expiration! So the common trade is to hold the future, and net out just before expiration when the price more accurately reflects the current spot market.

Answer 2

On international stock exchanges, they trade Puts and Calls, typically also for currencies.

If for example 1 NOK is worth 1 $ now, and you buy Calls for 10000 NOK at 1.05 $ each, and in a year the NOK is worth 1.20 $ (which is what you predict), you can execute the Call, meaning 'buying' the 10000 NOK for the contracted 1.05 $ and selling them for the market price of 1.20 $, netting you 12000 - 10500 = 1500 $. Converting those back to NOK would give you 1250 NOK. Considering that those Calls might cost you maybe 300 NOK, you made 950 NOK.

Note that if your prediction is common knowledge, Calls will be appropriately priced (=expensive), and there is little to make on them. And note also that if you were wrong, your Calls are worth less than toilet paper, so you lost the complete 300 NOK you paid for them.

[all numbers are completely made up, for illustration purposes]

You can make the whole thing easier if you define the raise of the NOK against a specific currency, for example $ or EUR. If you can, you can instead buy Puts for that currency, and you save yourself converting the money twice.

Answer 3

Forex trading contracts are generally fairly short dated as you mention. Months to weeks. Professional forex traders often extend the length of their bet by rolling monthly or quarterly contracts. Closing a contract out a few days before it would expire and reopening a new contract for the next quarter/month. This process can be rather expensive and time consuming for a retail investor however.

A more practical (but also not great) method would be to look into currency ETFs. The ETFs generally do the above process for you and are significantly more convenient. However, depending on the broker these may not be available and when available can be illiquid and/or expensive even in major currency pairs. It's worth a bunch of research before you buy.

Note, in both cases you are in a practical sense doubling your NOK exposure as your home currency is NOK as well. This may be riskier than many people would care to be with their retirement money. An adverse move would, at the same time you would lose money, make it much to buy foreign goods, which frankly is most goods in a small open country like Norway.

The most simple solution would be to overweight local NOK stocks or if you believe stocks are overvalued as you mention NOK denominated bonds. With this you keep your NOK exposure (a currency you believe will appreciate) without doubling it as well as add expected returns above inflation from the stock growth/dividends or bond real interest rates.

Answer 4

The increase of currency value in relation to another is a critical determinant of the economic health. It plays an important part in the level of trade and affects the world’s free market economy. But, they also effect on smaller scale as they create an impact on the portfolio of investors. So, it is suggested that the investors should make their trades wisely keeping in mind the value of other currencies that might your trade. Also, you should check the news daily to get regular updates and be well-informed of any changes happening in the market