Currency Hedging and Speculation

Currency trading using ETFs is a growing area. Hedging currencies using ETFs and ETNs can reduce the financial risk for global travelers and small companies doing business abroad. Currency speculation has also been made much easier for individual investors because of the trading flexibility of ETFs and ETNs. The securities pay a money market rate of interest based on the currency they are in while hedging against a decline in the U.S. dollar.

Are you planning a trip abroad and want to hedge the U.S. dollars you have saved for the event? Or perhaps you are saving for a villa in Italy? For a small annual fee, you can lock in the value of the currency you will be using for the event and receive interest on your money based on the interest rates prevailing in that region. Before leaving for the trip or closing on your villa, simply sell the ETF or ETN and withdraw U.S. dollars.

Are you a speculator at heart? Do you have a hunch that the Euro will decline against the yen? If so, short a Euro fund and buy a yen fund. If you are correct, the difference in total return from those funds goes in your pocket, minus commission costs.

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