what is currency trading insurance

The various instruments in the currency market, such as bonds and shares, offer a return on investment. However, investors also look for capital preservation, as well as the potential for growth. Capital preservation helps an investor to earn a fixed income on investment. This is often achieved by investing in bonds that pay fixed coupons. Investment in stocks, on the other hand, offers variable returns. While stocks do not carry a coupon rate, they enable investors to earn dividends. Investors also look at the underlying fundamentals of the business, to determine if the stock is a good value stock.

If it is, then there is a potential for high multi-fold returns. All these reasons make investors look at ways and means to ensure their investments. If you are a novice investor or an individual looking to make a career in finance, then you might be wondering about how to invest in the foreign exchange market and the risks associated with this volatile market.

Risk management is an integral part of any investment strategy. There are two types of risk in the foreign exchange market, fundamental and liquidity. Fundamental risk is associated with the difference in rates between two currencies, for example, the difference in rate between the U.S. dollar and the Japanese yen. The rate is different because of the difference in investor expectations from the economy of these two countries. Since there is hardly any difference between the risk and return, fundamental traders focus on managing the risk to their capital. There are two ways to do this. The first one is by adopting a trend-trading strategy. By analyzing the underlying fundamentals, a trader can determine if the currency is in a rising or falling trend.
A rising trend implies that the currency is overvalued while a falling trend signifies an undervalued currency. By adopting a trading strategy that trades in line with these trends, a trader can effectively manage the fundamental risk. The other way to manage risk is through the diversification of holdings. Traders can divide their assets and make multiple trades so that no single trade carries significant risk to the capital. Liquidity risk is the risk associated with the gap between buying and selling prices for a particular currency. This difference is due to the timing difference between when a trader buys and when he sells. Traders, therefore, attempt to reduce this gap by incorporating technical analysis in their trading strategy.
Another risk in the foreign exchange market is the risk attributable to the movement of interest rates. As interest rates move either upward or downward, it has a significant impact on the value of any currency\’s interest rate parity in relation to other currencies. Due to this, it is very important for value investors to have an understanding of how interest rates move before they make any investments. Interest rate movements are driven by many factors such as monetary policy, inflation expectations, and borrowing conditions. Movements in interest rates, in turn, affect currency valuations.
For example, as interest rates fall, currency valuations also fall because currencies lose their purchasing power when compared to domestic currency when interest rates fall. On the other hand, when interest rates rise, currencies gain value because they gain purchasing power when compared to domestic currency when interest rates rise. Liquidity-premium theory indicates that currencies that are more difficult to trade will carry a value premium due to the lower liquidity of the asset. An example of such an asset would be the Japanese yen, which is considered to be a safe haven currency and carries a substantial value premium.
The foreign exchange market opens 24 hours a day, five days a week. It follows a Monday to Friday close, with trading beginning on Sunday evening in Europe and ending Friday afternoon in New York. The open and close times are markers for trade entry and exit; traders can make or lose money anytime the market is open. Traders also can take advantage of weekends to strategize or recover from losses, as the market is closed Friday afternoon through Sunday evening in New York (unless there is a holiday on Friday, in which case the close moves to  Wednesday afternoon). Although capital is at risk at all times in the foreign exchange market, is closed for a portion of the day can attenuate risk.
Trading hours also can be used to traders’ advantage in other ways. For example, news that surfaces after trading in Europe have closed can cause a trader to wonder: “Would I have entered the trade if I knew this news?” Keeping open hours in mind when analyzing a trading strategy can be beneficial.
The forex market is the largest and most liquid of all financial markets, with daily volumes in excess of $1 trillion. Newcomers to the forex market might be surprised by this massive figure, but it makes sense when you consider that the foreign exchange market: serves as a medium for the trade of goods and services across national borders; serves as a convenient spot to convert foreign tourist dollars into local currency; serves as an outlet for international banks to borrow and lend capital; serves as a way for companies to convert overseas revenues back into a domestic currency, and serves as an investment vehicle.
The fact that so many people have access to the foreign exchange market has made it one of the most flexible and agile markets, with the following characteristics: high trade volume and low bid-ask spreads, meaning the little cost to trade; the ability to make fractional positions; the ability to go long or short; few restrictions on who can trade and how they can trade; and online accessibility.
Liquidity
Liquidity refers to the ease with which a position in a foreign currency can be closed — and how close the trader’s closing price will be to the transaction price. Liquidity can be measured in a number of ways, one of which is close to transaction ratio, which is the percentage of transactions that result in closing at the same price. A high-liquidity market is one in which transactions close with a low percentage difference between the purchase price and sale price—a