Investing in Currency

Investing in Currency Definition

Investing in currency refers to the act of buying one currency by selling the other pair or leg, which is usually done through a foreign exchange market known as forex.

How to Invest in Foreign Currency?

How to Invest in Currency

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Usually, there are the top 3 ways in which you can invest in a foreign currency, and they are listed as under

  1. Spot Trading: In this method of investing, one currency is exchanged for the other, and the settlement usually happens on a T+2 basis (Trade date+2 days)
  2. Forward Trade: In this investing contract, the party enters into a contract to exchange one currency for the other at a set price on a certain future date. It is OTC (Over The Counter )OTC (Over The Counter )Over the counter (OTC) is the process of stock trading for the companies that don't hold a place on formal exchange listings. The broker-dealer network facilitates such decentralized trading of derivatives, equity and debt more traded and is sometimes customizable.
  3. Futures Trade: It is similar to a forward trade of currencies except that the contract is furthermore standardized.

Examples of Investing in Foreign Currency

Below are examples of investing in foreign currencies.

Example #1

Mr. Smith is observing the USD/INR fluctuations. He has reason to believe that the USD will strengthen against the INR. Hence he may enter into a spot contract of buying 1 USD at 70.83 INR per USD and then sell into a three months futures contract at USD/INR=71, thereby making a profit in terms of 0.17 INR


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Example #2

An exporter in the US is looking at the exchange rate, which is currently going on at USD/GBP=0.81. He is concerned that the USD may appreciate the GBP in 3 months when he would get his receivables from the UK. Home currency appreciationCurrency AppreciationCurrency appreciation is a rise in the value of a national currency over the importance of international currencies due to an increase in the demand for domestic currency in a global market, a rise in inflation and interest rates, and flexibility of fiscal policy or government more is bad for the exporter. Hence he may hedge this contract with a three month forward on USD and GBP by buying a USD forward at the same rate of USD/GBP=0.81.

Example #3

SuperMoney LLC, a hedge fund that has entered into a short trade of security ABC Co in a different currency with a time horizon of 3 months and is worried about the FX rates when it needs to undertake cover trades and hence may enter into an FX transaction to hedge the exposure in this regard


Some of the advantages of investing in currency markets are as follows –

Disadvantages of Investing in Currency Market

Given below are the pointers that seek to elucidate on how investing in currency markets tend to be disadvantageous in some regards –


Investing in the currency market is not simple, contrary to investing in equity marketsEquity MarketsAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more. Thorough knowledge and understanding of the forex market are required to undertake any investment trades or contracts involving currencies. These currency markets stand as a brilliant source for an investor or a fund to hedge their foreign currency exposure, to diversify their portfolios, and also gain from FX gains in the process.

However, one needs to understand that the currency markets are quite complicated with lots of uncertainties and fluctuations, thereby creating scope for a huge amount of speculation, which may seem un-appropriate for the common amateur investor. Hence before venturing into investing in the currency marketCurrency MarketFor those wishing to invest in currencies, the currency market is a one-stop solution. In the currency market different currencies are bought and sold by participants operating in various jurisdictions across the world. It is important in international trade and is also known as Forex or Foreign more, one needs to understand and be clear of the dynamic to avoid huge unnecessary losses. Nevertheless, over the years, the currency markets have provided an excellent hedging source for investors and funds alike to protect them with their FX exposures.

This has been a guide to Investing in Currency and its definition. Here we discuss the types of investing in currency exchange markets along with the examples. You can learn more about investment banking from the following articles –

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