Concept

Currency – An Asset Class

In the world of ‘alternative investments’, currency portfolios have moved into the limelight by emerging as an asset class that compares favorably against others in terms of a) return, b) risk and c) correlation statistics.

They have shed their conventional skin as serving merely as a fund manager’s foreign exchange risk hedging device. Currency overlay is no longer the panacea to managing foreign-exchange risk. Creating independent alpha in the new asset class ‘currencies’ can outweigh beta gained from conventional overlay-currency hedging.

Currencies, as an asset class, demonstrate high liquidity and transparency and low correlation.

Currency as an asset class stand out for the following reasons:

• The global foreign-exchange (FX) market can be considered by far the largest marketplace in the world, not only geographically but also with reference to trading volume. The daily turnover is growing constantly and has long ago surpassed the $1 trillion mark: forty times the size of world trade.

• An important difference between currencies and other markets is that currency prices allow us to analyse also their reciprocal values. A falling dollar/yen is synonymous with a rising yen because the dollar can be expressed in yen and, vice versa, the yen in dollars. By comparison, the dollar is never measured in units, as the Dow Jones for example.

• For the same reason the expression ‘short sale’ – so much maligned in equity trading – does not exist in currency trading because the short sale of a currency is equivalent to a purchase of the other currency.

• For similar reasons, the currency market cannot suffer a ‘crash’ through which the wealth of all market participants dwindles. In the currency market each loss is matched by an equivalent gain of the counter-party.

• Another unique feature of the currency market is that it is active without interruption ‘round-the-clock’. Inefficiencies, e-forex, automation and STP In one of their annual surveys, Greenwich Associates states that the number of institutions globally trading FX as well as the

number of trades done online could easily top 50% in 2004, further proof that currency trading has now become a top contender as a desirable asset class.


If you would like to present a paper at Currency Investment World Asia 2007, please contact:

Chor Siew Pin (Ms)

Conference Manager

Tel: +65 6322 2719

Email: siewpin.chor@terrapinn.com