F E AT U R E D A R T I C L E
Currencies in Your Future Portfolio?
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ince the economic decline in 2008, there has been a growing demand of individual and institutional investors to consider various choices of non-correlated investments to reduce tail risk (downside deviation)i and correlation risk, often known as alternative investments. There is a good chance an investor will have stocks and bonds in their portfolio via a 401k, IRA, pension fund or directly into mutual funds. Perhaps they have some real estate either as an investment or the home they live in and maybe some private equity. In 2008 and 2009, most stocks both domestically and foreign became highly correlated as they headed south and everyone was seeking the exit door simultaneously, thus causing losses to extend as panic selling and the need to liquidate increased. One of the increasing areas of non-correlation investment is the currency market or sometimes called forex or FX (foreign exchange). In August, 1971 President Nixon
n By Mark Shore
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Micro-Cap Review Magazine
removed the U.S. dollar from the gold standard, ending the Bretton Woods agreement and causing currencies to float at market rates. In December 1971, Professor Milton Friedman wrote “The Need for Futures Markets in Currencies”ii. May, 1972, the Chicago Mercantile Exchange introduced currency futures.iii Currencies were the first financial futures contracts as all previous futures contracts were commodities. It made it easier for individual investors, traders and hedgers to have access to the foreign currency markets. Prior to the CME forex contracts, only corporate hedgers were allowed to deal directly with a bank via the interbank and forward contracts.
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