For purposes of financial disclosure, “foreign currency” is the official currency of a country other than the United States. It is possible to hold a foreign currency through a foreign exchange transaction. A foreign exchange transaction results in the purchase of one currency for investment purposes and the simultaneous sale of another. This constitutes an open position that is later offset to terminate the position. Both the short and the long position must be offset to close out the holding. One may take a position in a foreign currency for speculation or for hedging purposes. The increase or decrease in the exchange rate between the two currencies may result in a profit or loss. A foreign exchange transaction always involves a currency pair of which the first listed is the “base currency” and second is the “quoted currency.” For example, in the US Dollar-Japanese Yen pair, the US Dollar is the base currency and the Yen is the quoted currency. The nature of a foreign exchange transaction requires that you are always long one currency of the pair and short the other. This process happens through a foreign exchange broker, who bankrolls the entire transaction by supplying all the currencies in the exchange. So, for example, if you anticipated that the Dollar was going to appreciate versus the Yen, you could buy the Dollar and short the Yen. You borrow the Yen from your broker and then sell short the Yen and simultaneously buy the Dollar. In this example, the broker would charge you interest on the Yen that the broker lent you, and the broker would pay you interest on the Dollar, which you own but which is held by the broker.
This guide is not intended to provide investment advice, and you should not rely on statements in this guide when making investment decisions.
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