Trading in the Retail Off-Exchange Foreign Currency

Trading in the Retail Off-Exchange Foreign Currency Market: What Investors Need to Know National Futures Association 200 West Madison Street, Suite 1600 Chicago, Illinois 60606-3447 800-621-3570 www.nfa.futures.org National Futures Association is a congres- sionally authorized self-regulatory organiza- tion of the United States futures industry. Its mission is to provide innovative regulatory programs and services that protect investors and ensure market integrity. NFA has prepared this booklet as part of its continuing public education efforts to provide information to potential investors. The booklet presents an overview of the retail off-exchange foreign currency market and provides other important information that investors need to know before they invest in the off-exchange foreign currency market. INTRODUCTION Companies and individuals may speculate in foreign currency

exchange rates (commonly referred to as “forex”), and a num- ber of firms are presently offering off-exchange foreign cur- rency futures and options contracts to the public. If you are a retail investor considering participating in this market, you need to fully understand the market and some of its unique features. NFA has prepared this booklet to educate you about off-exchange foreign currency trading. Like many other investments, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all investors. In fact, you could lose all of your initial invest- ment and may be liable for additional losses. Therefore, you need to understand the risks associated with this product so you may make an informed investment decision. You should also understand the language of the forex markets before trading in those markets. The glossary in the back of this booklet defines some of the most commonly used terms. This booklet does not suggest that you should or should not participate in the retail off-exchange foreign currency market. You should make that decision after consulting with your financial advisor and considering your own financial situation and objectives. In that regard, you may find this booklet help- ful as one component of the due diligence process that investors are encouraged to undertake before making any investment decisions about the off-exchange foreign currency market. Finally, the discussion in this booklet assumes you are funding your forex account with US dollars. The principles in this booklet apply to all currencies, however. 1 THE FOREIGN CURRENCY MARKETS What are foreign currency exchange rates? Foreign currency exchange rates are what it costs to exchange one country’s currency for another country’s currency. For example, if you go to England on vacation, you will have to pay for your hotel, meals, admissions fees, souvenirs and other expenses in British pounds. Since your money is all in US dollars, you will have to use (sell) some of your dollars to buy British pounds. Assume you go to your bank before you leave and buy $1,000 worth of British pounds. If you get 565.83 British pounds (£565.83) for your $1,000, each dollar is worth .56583 British pounds. This is the exchange rate for converting dollars to pounds. If £565.83 isn’t enough cash for your trip, you will have to exchange more US dollars for pounds while in England. Assume you buy another $1,000 worth...

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