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Introduction

1. Technical analysis

1.1 Postulates technical analysis

1.2 The market follows the trend

1.3 The market is natural - history repeats itself

2. Fundamental analysis

2.1 Foreign exchange market

Conclusion

Bibliography

Application

Introduction

Building optimal currency portfolios, the main problem associated with them are risks. It will not be possible to completely eliminate the risk, but we must minimize it. Risk reduction is achieved through diversification (working with several currencies in such a way that the fall in the value of one currency is offset by the growth of another). In addition, there are statistically related currencies in the markets, which can also be used to reduce risk. Therefore, with an effectively selected structure of the portfolio of currencies, it is possible to reduce the risk of trade transactions.

The formation of an asset portfolio consists of the following steps:

1. Selection of assets to be included in the portfolio.

Based on:

inclusion in the portfolio of the least correlated currencies (unrelated currencies);

the choice of those currencies, the probability of a correct forecast for which is the highest;

inclusion in the portfolio of negatively correlated currencies.

2. Calculation of the optimal portfolio structure.

The calculation of the optimal portfolio structure makes it possible to obtain many efficient portfolios on a risk-return scale. The calculation allows you to get the values of the weight of each asset in the portfolio, the risk of the portfolio as a whole, its profitability.

3. The choice of portfolio structure depending on the attitude to risk.

4. Choice of directions for opening positions.

5. Opening positions and tracking them.

The relevance of this topic today is quite high, it is primarily due to the fact that when the currency of your country falls or inflation against another currency, you simply not only lose nothing, but you can earn plus everything, so many people do not keep their money in the national currency and there are more and more such people from year to year. And when compiling currency portfolios, it is possible to good interest receive (unlike a bank) from the amount that you have invested in a certain currency.

The problem in the scientific literature is covered only in narrow circles, since this market is relatively young (unlike the market valuable papers) and consideration of the five stages that form the basis of the investment process:

Choice investment policy.

Analysis foreign exchange market.

Formation of a portfolio of currencies.

Revision of the portfolio of currencies.

Evaluation of the effectiveness of a portfolio of currencies.

The first stage - the choice of investment policy - includes determining the goal of the investor and the amount of invested funds. Investment objectives should be formulated taking into account both profitability and risk.

The second stage of the investment process, known as currency analysis, involves the study of individual types of currencies within the main categories.

The third stage of the investment process - the formation of a portfolio of currencies - includes the determination of specific assets for investment, as well as the proportions of the distribution of invested capital between assets.

The fourth stage of the investment process - portfolio review - is associated with the purpose of investing by periodically repeating the three previous stages. That is, after some time they can change, as a result of which the current portfolio will cease to be optimal.

The fifth stage of the investment process - assessing the effectiveness of the portfolio - includes a periodic assessment of both the profitability received and the risk indicators that the investor faces.

Objective:

1. Methods of analysis to identify the best and optimal exchange rates.

2. The ratio of the contribution of currencies with the least risk and the highest profit.

3. Consideration of changes in the foreign exchange market from five to fifteen years.

1. Technical analysis

A currency portfolio is the placement of your assets in different currency pairs.

Technical analysis of the market is a study of the dynamics of the currency or stock market, namely: prices, volume and open interest- in order to predict the future direction of price movement. Most often, technical analysis is carried out through charts.

Technical analysis in its simplest form includes studying the conjuncture of exchange rates in order to predict the dynamics of exchange rates. Tools for technical analysis - charts. They clearly reflect the final picture of the market movement and the rates of individual issues. Information about price movements is represented by a graph (curve) in which the analyst tries to find stable, repeating patterns. The main types of such configurations (types of behavior) are classified, and one of them is tried to be found in the current price information. If this succeeds, then future price behavior is predicted based on this configuration.

An alternative way to study the market is based on the use of different types of statistical data. Therefore, technical analysis is the analysis of data over time; for him it is necessary to have information for any period of time in order to analyze it by technical methods.

1.1 Postulates of technical analysis

Any factor that affects the price dynamics - economic, political or psychological - is already taken into account by the market and included in the price. Therefore, studying the price chart is all that is required for forecasting.

This postulate echoes the efficient market theory, according to which all new information is almost instantly reflected in market prices. Thus, it is impossible to make a profit, focusing on some information or the past price dynamics. Conclusions of the efficient market theory:

no one can predict the dynamics of market prices;

all market prices are fair for these assets, and there are no mispriced goods.

The main consequence of the first postulate is the need to carefully monitor and study the dynamics of prices. Analyzing price charts and many additional indicators, a technical analyst ensures that the market itself indicates to him the most likely direction of its movement.

The most common points of criticism of this postulate are:

the postulate rests on the assumption that all investors receive information at the same moment, which, of course, is not true. For example, daily chart traders rarely look at intraday news;

the postulate assumes that it is impossible for the market to release news, under which it would not have “mortgaged” yet; however, quite often there are so-called shocking news on the market that go beyond the forecasts of most analysts.

1.2 The market follows the trend

According to psychological research, it is known that a person as a social animal cannot live outside of society. The social nature of a person predetermines the tendentiousness of his behavior, which intensifies in the crowd, in its mass manifestations, for example, in the market.

The second postulate lays the foundation for trend analysis, which is the core of technical analysis. Even investors who do not believe in technical analysis do not deny the existence of a market trend.

The tendency of price movement implies the following:

the current trend is more likely to continue than change direction;

the trend will move in the same direction until it weakens.

The result of applying the second postulate is the rule that most technical analysts use: trade the trend as long as it exists.

There are three types of trends:

A bullish trend is when prices move up.

A bearish trend is when prices move down.

Lateral - when there is no definite direction of price movement up or down.

The points of the most common criticism of the second postulate are:

the postulate is too trivial, since the converse statement - "prices do not move in a direction" - would be equivalent to the statement "prices do not move";

the postulate does not give an understanding of what exactly is an upward, downward and lateral trend.

1.3 The market is natural - history repeats itself

If we believe in the existence of certain market laws, then we can assume their operation in the future. This gives us reason to expect a repetition of the patterns found.

The third postulate of technical analysis - "the market is natural", or "history repeats itself" - means that the rules that were in force in the past will be in force in the present and future. It is this statement that gives us reason to carry out not only technical, but also statistical analysis, because each of them builds their conclusions by examining old information.

The disadvantage of the third pillar of technical analysis is the individuality of each moment of history. It is also impossible to enter the same river, so two identical market situations cannot develop. A similar argument can be made against fundamental analysis. However, despite the fact that it is really impossible to step into the same river twice, in general principles its course, the river remains the same. So the market, although it always has some peculiarity, is generally logical.

The consequence of this postulate: a thorough analysis of the past behavior of prices allows you to predict the movement of prices in similar situations in the present.

The most common points of criticism of the third postulate:

it is not entirely clear why mass behavior does not change over time, in fact, the trading community is self-learning from its own mistakes;

mass behavior in the market is based not only on mass psychology, but also on the methods used by the trading community, and these methods, in turn, change and modify quite quickly, new ones are created.

Thus, technical analysis is a means of statistical evaluation of mass human psychology. It is believed that the ideal technical methods should work the same in all markets. The main thing that is needed for this is a sufficient amount of data on previous market movements (presence of a representative price history).

2. Fundamental analysis

Fundamental analysis studies the movement of prices at the macroeconomic level. It can help determine the main market trend (the trend is the main direction of the dynamics market price), however, to determine the specific moment of the transaction, fundamental analysis is often not enough.

As is known, exchange rate is formed mainly under the influence of the following factors:

the ratio of demand and supply of currency, which is determined by many factors. The dynamics of the exchange rate of an individual state is determined by the competitiveness of its goods in world markets, the change in which, ultimately, is due to the level of technology and production technologies;

interest rates ( Interest rate- the relative amount of income for a fixed period of time. The ratio of income to the amount of debt).

The simple interest rate formula is:

P - initial value sum of money.

S - final amount of money.

I - interest rate.

T is the term of the deposit or loan.

Compound Interest Formula:

ratios of inflation rates (The rate of inflation is the rate of development of inflation processes, determined by the rate of price growth. There are three main rates of inflation: moderate, galloping, hyperinflation);

state of the national financial market(represents a set of supply and demand for the capital of creditors and borrowers of a certain country);

the degree of use of certain currencies in international settlements;

the national regulator, since the exchange rate is an object of regulation;

currency restrictions, that is, a set of measures aimed at limiting transactions with currency, gold and other currency values.

2.1 Foreign exchange market

The foreign exchange market is a market for conversion (exchange) foreign exchange transactions. Conversion currency operations- transactions for the exchange of one national currency to another at the exchange rate agreed upon by the two parties with the delivery of these currencies on a certain date.

Currency trading is mainly concentrated on two platforms:

Forex (Foreign Exchange) is an interbank foreign exchange market that trading platform can only be named conditionally (physically you will not find such a place);

CME (IMM) & GLOBEX - during the work of the exchange, futures contracts are traded in IMM (International Monetary Market) - a division of the Chicago commodity exchange(CME), OTC - on GLOBEX.

There are several main types of such operations:

transactions of the spot type (spot), where the delivery date is the second business day after the date of the transaction;

forward operations (forward), where the delivery time can range from several days to several years;

over-the-counter currency options (OTC options), where the delivery time and price are determined by agreement of the parties - the bank or brokerage company, on the one hand, and the client, on the other;

exchange currency futures and options (futures and options), where the delivery time is determined by the exchange in accordance with the exchange rules.

Rice. 2.1 - Revolutions on the traditional Forex market(instruments), billion dollars

From this calculated histogram, we can see that over the 15 years, growth in the use of tools has grown steadily (with the exception of 2001). Since 1995, the swap tool has been heavily dominant over the others, and since 2001 it has been more, even if all the other tools are taken together. Over 15 years (1992 to 2007), the share of classic spot transactions dropped significantly from 48% to 31%, while the share of forward and swap transactions increased from 47% to 65%. However, the decrease in the share of spot - transactions was not accompanied by their physical decline, so the liquidity of the spot - market for 15 years increased by 2.5 times.

Let's take 2004 and 2007 as an example. Because it was during these three years that a significant leap took place. Consider changing the three main instruments: spot, swap, forward. Let's start with forward transactions - operations 208*100/362=57.46%. Spot transactions showed slightly higher interest among traders 621*100/1005=61.79%. The total difference is 4.33%. Well, the smallest result was shown by swap - operations 944*100/1714=55.07%. In general, the instruments increased by (107+208+944+621)*100/ (129+362+1714+1005)=18800/3210=58.57%

As for currency instruments, we have considered them, but we need the most “traveling” and liquid currencies for the portfolio in order to build a portfolio that is most profitable, but less risky. These currencies were: the US dollar, the euro, Japanese yen, pound sterling, swiss krone, Australian dollar and the Canadian dollar. And all other currencies were folded into a single one.

Rice. 2.2 - Turnovers in the traditional Forex market (currencies)

On this histogram and table, you can clearly see which currencies have been the most dominant in trade over the past 15 years. The predominance of the dollar shows that the main trades were against this currency. But the indicator of cross-rates is also noticeable (the cross-rate is the exchange rate between currencies, excluding the US dollar).

Rice. 2.3 - Turnovers in the traditional Forex market (currency pairs), bln. Doll.

The most popular currency pair on the world currency market for all types of traditional Forex transactions is, of course, the euro/dollar, which is more than twice ahead of the dollar/yen and pound/dollar pairs. Surprisingly, the operations of the Australian dollar against the US dollar took the fourth place in terms of turnover.

For comparison: the average daily volume of trading in exchange currency futures is only $12 billion. However, in fairness, I note that on the exchange the standard contract size is about $100,000, and not $5 million, as in the spot market, i.e. 50 times less. And if we compare the average daily number of transactions for derivatives market and the spot market - transactions, then it will be comparable - approximately 120,000 each (data for 2003). So for "small" investors, exchange futures and options will be more preferable in terms of liquidity comparable to the corresponding margin accounts, and for large ones - Forex.

From a visual example, we see that three currency pairs are strongly dominated - these are EURUSD, USDJPY, GBPUSD due to their liquidity and a good volume that has grown over 6 years. As for the dynamics of the market, its trend, so to speak, we will consider in the following table, currency pair euro/dollar.

On the presented charts, I used two types of MA (moving average) moving averages.

The moving average (MA) is one of the oldest and most widely used technical analysis tools. MA shows the average value of the price for a certain period of time. When calculating the moving average, a mathematical averaging of the currency price for a given period is performed.

The first type of MA is the SMA (Simple Moving Average) or simple moving average with a value of 21.

Simple moving average (SMA). It is calculated according to following formula: SMA = Sum(Pi)/n, where n - number of days (average parameter), Pi - currency quotes for all days involved in the calculation of the current average value.

In Russian, if we add up the last n prices and divide the sum by their number (n), we will get the average price value for the last n periods. This will be the current value of the simple moving average.

The second type of MA is the EMA (Exponential Moving Average) or exponential moving average with a value of 8.

The exponential moving average is calculated by the formula: EMA = EMA(t-1) + (2/(n+1))*(Pt - EMA(t-1)), where Pt is the current quote; n - averaging period. As you can see, each new EMA value contains information about the previous one - the formula for calculating the current EMA uses the previous EMA(t-1) value.

The MACD oscillator is no less significant on this chart.

An oscillator is an indicator, usually based on prices, that tends to fluctuate or "oscillate" within some fixed or fairly tight range. Oscillators are characterized by range normalization and removal of long-term price level trends - information is extracted by oscillators from such ephemeral indicators as momentum and overvoltage. Momentum is a state when prices are powerfully moving in a given direction. Overvoltage is a state of excessively high or low prices("overbought" and "oversold"), when prices are ready to sharply return to a more reasonable level.

Moving average convergence/divergence (MACD) is one of the complex indicators of inertia. It is based on the intersections, convergences and divergences of two moving averages. To calculate it, three EMAs are used: two EMAs from closing prices at different time intervals and one EMA calculated from the values of the difference between the values of the first two (sometimes from the quotient values)

I have taken the values of two EMAs from closing prices with values of 12 and 26. And the third EMA with a value of 9. For example, we want to calculate an indicator based on 12- and 26-day EMAs - let's see how this is done. First, we calculate two EMAs at closing prices - EMA12 and EMA26. Then the value of the 26-day EMA is subtracted from the 12-day EMA, and the difference is plotted on the chart with a thick line. We immediately calculate the 9-day EMA from this difference at a coefficient of 0.2 and plot it on the chart with a dashed line.

Since 2001, the so-called "bullish" trend was born and until August 2008 it persisted. This is a good enough period to invest your funds in this currency pair, as there is minimal risk and "ideal" entry points. But when 2008 came in August, traders realized that the currency was quite expensive and they dropped it within three months, something that the bulls had been building for two YEARS!!! Since then (to this day) the market has been trending sideways, in the presence of SMA 21 and EMA 8, and MACD entry signals (along with the trend) will only be false, which will inevitably lead to the loss of large funds in your portfolio. Therefore, since November 2008, you need to play, only from the levels!

When compiling currency portfolios, an investor thinks about four things: return on investment, growth of investments, liquidity of investments, safety of investments. Therefore, he understands that medium-term trading will bring him highest income and less risk than in the long run!

Based on the closing price of Appendix 1, we will build five charts from 2001 to 2008:

asset portfolio currency futures

Of all the graphs built, the highest approximation is for the polynomial trend line, which is exactly 0.88.

What is this level of confidence in the approximation?

The value of the coefficient itself is in the interval . And if in a simple way, then the closer the value is to one, the stronger the relationship between the data on which the trend is built. Conversely, the closer the value is to zero, the weaker the relationship.

Therefore, we can conclude that the statistical parameter, as a polynomial approximation confidence level, gives the most best level, compared to other trend lines.

Conclusion

The main goal of forming a currency portfolio is to seek to obtain the required level of expected return at a lower level of expected risk. This goal is achieved, firstly, by diversifying the portfolio currency, i.e. distribution of the investor's funds between different currencies, and, secondly, a careful selection of financial instruments.

The main parameters in managing a foreign exchange portfolio are its expected return and risk. Today, the assessment of these parameters is based on the use of statistical and mathematical methods for selecting financial instruments.

The presence of portfolio risks (credit, interest, investment, currency) requires competent management of the process of forming a foreign exchange portfolio. Currency portfolio management in general view is its formation in compliance with all the parameters established credit policy and ensuring the efficient functioning of the bank. The central link in managing a foreign exchange portfolio is an adequate assessment currency risks and their elimination.

In his term paper I considered the growth in the use of different instruments for the foreign exchange market, which helps to operate more flexibly in the market and more profitable with the least risk to build a portfolio. Calculated the most trading and liquid currencies over the past fifteen years. How much trading in major currency pairs has grown from 2001 to 2007. I analyzed in detail the euro / dollar currency pair from 2001 to 2007, where it was considered every month of its change.

I believe that investing your funds in other currencies of countries and gradually building an optimal currency portfolio is much more profitable than investing your money in banks at interest, since the profit received from foreign exchange transactions more than covers all the losses that the investor receives during that period. time while holding a foreign exchange portfolio. And on top of that, he gets much more profit than in a bank, but people are afraid to give their money to some new “industry” that they have not heard of, so many still go to the bank and believe that this is the most The best way multiply your funds!

Bibliography

1. Eric Nyman Small encyclopedia of a trader - 2009. -№10. - 452 p.

2. Jack Schwanger Technical analysis. Full course - 2008. - No. 5. - 806 p.

3. B. Rubtsov Modern stock markets - 2007. - 926 p.

4. V. Tvardovsky, S. Parshikov Secrets of stock trading - 2008. - No. 5. - 550 s.

5. Ralph Vince Mathematics of money management. Risk analysis methods for traders and portfolio managers. - 2007. - No. 3. - 400 s.

Application

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67,. Bank currency portfolio management

Management of the banking currency portfolio is to achieve in each period of time its optimal state. The complexity of the task of forming an optimal investment portfolio lies in the desire to maximize the expected return on investment at a certain level of risk acceptable to the bank.

When managing a currency portfolio, the bank faces many complex problems in the formation and evaluation of the portfolio - from forecasting the dynamics of the foreign exchange market as a whole and the rates of individual currencies, up to forecast of macroeconomic indicators and assessments of their impact on the behavior of individual assets.

Harry Markowitz's Portfolio Theory provides answers. According to this theory, the risk of assets is considered as the risk of the components of a single portfolio, and not of individual units. An important point, therefore, is to take into account mutual correlations between the returns on portfolio assets. It is this accounting that allows for effective portfolio diversification, leading to a significant reduction in its risk compared to the risks of individual portfolio assets.

The technique based on the Markowitz theory makes it possible to calculate the effective set of portfolios that provide the maximum expected return for a fixed level of risk and minimum risk for a given level of expected return.

Let's consider an example that compares the risk-return ratio of an optimal currency portfolio and a portfolio based on subjective assessments. Note that the optimal portfolio is one that lies on the effective frontier of portfolios and corresponds to the bank's preferences in terms of risk or return.

For a set of assets that make up a currency portfolio (no matter how many there are), a curve of effective portfolios is constructed, consisting of different combinations of assets. The position of the bank's currency portfolio in relation to the effective frontier is determined. The preferences of the bank are taken into account, which in this case wants to minimize the risk while maintaining the current profitability. The value of an efficient portfolio lies in the fact that the expected return is obtained at a lower level of risk than the original portfolio.

However, asset behavior changes over time, with the result that the current portfolio may no longer be optimal. Again, the question of portfolio optimization arises.

By selling part of the existing assets and acquiring others, the bank can form a new portfolio that is optimal for this moment time.

The use of quantitative methods and the latest computing technologies allows the bank's management to best parameterize and solve the problem of finding the optimal ratio between the components of the foreign exchange portfolio, minimizing the risk of the entire portfolio. At the same time, the risk of the optimal portfolio, quantified by VaR technologies, below the risk of the original portfolio.

68. Assessment and management of currency risk. Requirements of banking supervisors

Currency risk is the risk of loss due to changes in exchange rates that are unfavorable for the bank. The concept of "currency risk" is due to the fact that usually the assessment of the results of the bank's activities is carried out in one currency, called the "base".

The problem of risk is one of the key in the activity commercial bank. For any commercial bank, it is important not to avoid risk at all, but to anticipate and reduce it to a minimum level. Currency risks are part of the commercial risks to which participants in international economic relations are exposed. Currency risks are the probability of losses as a result of changes in the exchange rate of the price (loan) in relation to the payment currency in the period between the signing of the contract or loan agreement and the payment. The currency risk is based on the change in the real value of the monetary obligation in the specified period.

The occurrence of currency risks is associated with the following factors:

The main currency risk may arise upon completion of a transaction in ruble terms with subsequent conversion of the proceeds received into its currency equivalent.

Currency risk also arises when using ruble collateral. A sharp appreciation of the exchange rate may result in the collateral not covering the existing debt to the borrower's bank.

Another equally important factor is the depreciation of the currency in which the banking operation is carried out against the ruble.

Currency risk for the borrower may arise if a settlement transaction is completed in one currency if it is necessary to convert it into another. A change in the exchange rate may lead to existing losses for the client and the emergence of currency risk for the bank.

Commercial banks face foreign exchange risks in their daily activities. They must have effective tools for daily monitoring of all types of risk, both individually and in aggregate for the entire currency portfolio of the bank. By applying various technologies for assessing foreign exchange risks, the bank can most effectively calculate the quantitative measures of foreign exchange risks, and therefore effectively manage the foreign exchange risks of the CB.

Currency risks are usually managed in banks by various methods.

The first step towards managing foreign exchange risk within a bank's structure is to set limits on foreign exchange transactions. For example, the following types of limits are very common:

limits for foreign countries (the maximum possible amounts are set for transactions during the day with clients and counterparties in the amount from each specific country)

limits on transactions with counterparties and clients (the maximum possible amount is set for transactions for each counterparty, client or types of clients)

limit of instrumentation (setting limits on the instruments and currencies used with the definition of a list of currencies and trading instruments that can be traded)

setting limits for each day and each dealer (usually the size of the maximum possible open position for traded foreign currencies, possible to be carried over to the next business day for each specific dealer and each specific instrument)

loss limit (the maximum possible amount of losses is set, after reaching which all open positions must be closed at a loss). In some banks, such a limit is set for each business day or a separate period (usually one month), in some banks it is divided into certain types instruments, and in some banks can also be installed on individual dealers.

In addition to limits, the following methods of reducing currency risks are used in world practice:

mutual offset of the purchase and sale of currency for assets and liabilities, the so-called "matching" method, where by deducting the receipt of currency from the amount of its outflow, the bank has the opportunity to influence their size and, accordingly, their risks.

the use of the "netting" method, which consists in the maximum reduction in the number of foreign exchange transactions by means of their consolidation. For this purpose, banks create divisions that coordinate the receipt of applications for the purchase and sale of foreign currency.

acquisition of additional information by purchasing information products of specialized firms in real time displaying the movement of exchange rates and the latest information.

thorough study and analysis of foreign exchange markets on a daily basis.

And of course, hedging is used to limit currency risks. One of the disadvantages of general hedging (i.e. reducing all risks) is the rather significant total cost of commissions and option premiums. Selective hedging can be seen as one way to reduce overall costs. Another way is to insure risks only after rates or rates have changed to a certain level. It can be assumed that to some extent the company can withstand adverse changes, but when they reach an acceptable limit, the position should be fully hedged to prevent further losses. This approach avoids the cost of risk insurance in situations where exchange rates or interest rates remain stable or move in a favorable direction.

Another method of managing currency risk is the analysis of the movement of exchange rates. Such analysis is fundamental and technical.

Authority requirements banking supervision. In order to minimize possible currency risks arising from the CB, the Central Bank of the Russian Federation has developed special requirements for the limit of the open currency position of the CB. Currency position – balances of funds in foreign currencies that form assets and liabilities (taking into account off-balance sheet claims and liabilities on pending transactions) in the respective currencies and therefore create the risk of additional income or expenses in case of changes in exchange rates, is determined daily .

The bank's currency position is determined by the ratio of its claims and liabilities in the respective currencies. If they are equal, the currency position will be closed, in case of mismatch - open. An open position can be short or long. Short called a position in which the obligations in foreign currency quantitatively exceed the requirements. It is marked with a "-". Long position arises when the requirements in in. currency exceed liabilities. A long position is indicated by a "+" sign.

The limit of the gross position for the entire currency portfolio is determined daily and is set as a standard of the Central Bank in the amount of<=20%, чтобы сократить возможные расходы при неблагоприятном изменении курса ин.валюты. Лимит ВП = /вал.позиция/ * курс ин.валюты на 1 число месяца / СК * 100%. Лимит валютной позиции по отдельным элементам портфеля должен по требованиям ЦБ быть <= 10%.

Financial markets provide unique opportunities for all those who aim not only to receive additional income, stable income, but also to obtain what is commonly called financial freedom and independence. However, in order to really turn these goals into reality, you need at least an understanding of the work of money over time, risk assessment and, of course, knowledge.

In general, the instruments used by the majority for investing or trading differ little in variety, where, as a rule, preference is given to such forms as a bank deposit, or an attempt to catch luck by trading in the Forex market. Without begging the dignity of these ways of investing and working money, it is still worth paying attention to other ways to make your family or corporate capital really work, where such strategies as currency investment using the currency portfolio method are not the last.

This article will talk about what a foreign exchange portfolio is, what place it occupies in the overall investment strategy in the foreign exchange market, and how to use it correctly so that it helps not only save money, but also receive a relatively stable income, regardless of crises.

Before talking about how to use the currency portfolio investment technique, it is necessary to recall in general terms what portfolio theory actually is and how it works. As you know, any asset, be it a stock, a currency or a commodity, has its own periods of change in value, which are in the form of price fluctuations represented by a certain curve. These fluctuations depend on many factors.

For example, if we talk about shares, then such factors as the work of the issuing company, how adequately the market evaluates its work, general economic cycles in the world and the country, market conditions, etc. are important here. The same applies to exchange rates, where some currencies are unshakable like a rock, while others have the ability to periodically grow or fall by tens of percent every year.

As a method of money management, just the same, it has as its goal, by selecting the appropriate assets, to make these fluctuations in the total amount give some positive income received by the investor. Those. in other words, stocks with different fluctuations, collected in a single portfolio by overlapping the fall of some stocks with the growth of others, create a form of capital work that, under almost any market conditions, gives the investor a stable income.

Is this option possible when investing in the foreign exchange market?

The answer can only sound in the affirmative, since the currency as an asset has the same cyclical properties as stocks and other financial instruments. Working on the foreign exchange market, a forex trader usually tries to get his income due to these fluctuations, by conducting frequent purchase and sale transactions, which, of course, is not possible for everyone.

That is why, just like with stocks, you can create a portfolio of various currencies, which, with a certain combination, can generate income in the form of a positive exchange rate difference, for example, against the ruble for a sufficiently long period of time.

What are the advantages of a currency portfolio as a method of working in the market:

There is no need to constantly make transactions, as it happens in the Forex market
You can choose any price range of invested capital, and without the use of borrowed funds or leverage.
Relatively not difficult, since his work is set for at least a year or two.
You can do without the services of intermediaries, brokers, forming their portfolio, both in cash and on bank accounts or deposits (which will also bring additional interest income).
Relative stability of the foreign exchange portfolio to market events and fluctuations, enabling the investor to predict in advance the flow of profit for a long time ahead.

The only drawback of the foreign exchange portfolio is that its profitability is usually low, and in rare cases exceeds 10% per annum. But the main task when working with a foreign exchange portfolio is to obtain a guaranteed foreign exchange income over a long period of time, which, taking into account reinvestment (see), gives much better results than trading, with a low level of risk.

Basic principles and methods of forming a foreign exchange portfolio

In general, the system and principles of the formation and operation of the currency portfolio are the same as in the management of capital of any form:

Period. For currency investment, unlike trading, long time intervals are used (at least a year). This is due to the fact that the full cyclic fluctuations of the major world currencies (Dollar, Pound, Yen and Euro) are determined by this particular cycle. All other periods, for example, during the day, week, and even month, are just “market noise”, which is exactly what traders use.
Yield. As already mentioned, it is difficult to expect profitability from a currency portfolio as in the same stock market, since the price fluctuations of currencies are quite limited, which can be clearly seen on their charts.
Risk. The main goal of a portfolio of currencies is to reduce risk to such a level that it also has an acceptable return. Naturally, if the risk is completely eliminated, then there will be no income, for example, by hiding the purchased dollars in a “glass jar” and “forgetting” about them for many years. The dollar, oddly enough, is also depreciating, though much more slowly than the ruble.

Another important point in the formation of a currency portfolio is the correct choice of initial instruments and their effective combination, or diversification. The seemingly simple principle of not putting your eggs in one basket, in fact, when working with currencies, it looks a little more complicated.

For example, if we take a simple diversification, which is used by many ordinary people, when the dollar and the euro are bought in equal parts, then if you carefully calculate, the final profitability is almost zero and even has a slight negative value.

Why is this happening?

The answer is simple - you just have to look at the dollar and euro charts. As you can see, these two leading world currencies, as professionals say, work in antiphase. Those. the dollar rises, the euro falls and vice versa.

That is why, in order for a portfolio consisting of such currencies to make a profit, you need, for example, to choose a combination of 70% in dollars and 30% in euros, since the dollar is a stronger currency against the euro (“senior”), and the main yield from the exchange rate difference to the ruble will always be for the dollar. And the euro will only add to this yield, in those infrequent periods when the dollar will decline against world currencies.

Another example can be given when the currency portfolio consists of the three leading world currencies - the dollar, the yen and the euro. Such a portfolio, which has the absolute minimum risk, should consist of 82% of dollars, 8.0% of yen, and the share of the euro should be 10%. But the expected return on such a portfolio is about 1% per annum, which is the price for that there is no risk.

There can be countless combinations of currencies included in a portfolio, but one should take into account such a factor as portfolio manageability. And in this case, novice investors should limit themselves to 4-5 currencies, which will not greatly affect profitability, but will enable the novice to calmly monitor the situation and manage their capital.

You can also include regional currencies in the portfolio, such as the Hong Kong dollar, the Singapore dollar and the Australian dollar. The main principle in the formation of a currency portfolio that must be observed is that the highest currency should always go first in the portfolio share, then the weaker one and so on until the weakest, so that the ratio is maintained in the numerical proportion of 1.68.

For example, if the portfolio consists of dollars and euros, then 70/30. If from three currencies, then 80/12/8, etc. Moreover, the priority is always for the highest currency. As for the exchange rates of the euro and yen against the ruble, in nominal terms they will grow, as the dollar will increase against the ruble.

The dollar will grow against the ruble, if only because the inflation rate in the United States in the coming years will certainly be much lower than in Russia.

There are many screenshots in the article. All screenshots are clickable to expand to full size.

Why are the ruble, hryvnia and other currencies collapsing?

If you know why the exchange rate of the ruble, hryvnia, Argentine peso, Turkish lira, Venezuelan bolivar fell and will continue to fall, feel free to skip this subsection.

Expand hidden subsection text.

Consider situations with collapsing currencies.

Inflation in Russia reached 163%:

Unlike resource-poor countries, Russia has great natural wealth and financial reserves. And even the Bank of Russia is a private joint-stock company, which is only formally subordinate to the government. It would seem that the control of the ruble exchange rate can be carried out easily and naturally. But in fact, the Central Bank of Russia, through the currency board mechanism, is a simple currency exchanger. If the Central Bank of Russia does not intervene and allows speculators to collapse the ruble, the rise in prices for imported goods leads to inflation and the fall of the ruble. If the Central Bank of Russia intervenes and sterilizes rubles through the currency board, then the volume of working capital of the economy decreases. Which in turn leads to higher interest rates and inflation. Therefore, the ruble has only one long-term perspective - to depreciate. It may not be as fast as resource-poor countries, but the depreciation trend will continue. The dreams of Glazyev and dreamers like him that the Central Bank of Russia will lend to the Russian economy will remain dreams. So the currency board will continue to stifle the Russian economy and devalue the ruble.

Inflation in Belarus since 2010 has amounted to more than 670%:

Belarusian rubles are depreciating against other currencies due to the issuance that local authorities are forced to carry out. The excess of imports over exports creates an increased demand for currencies, which need more than the country earns. Government access to the printing press is the easiest way to quickly solve economic problems. Therefore, Belarusian rubles cannot but depreciate.

Inflation in Ukraine since 2010 has been more than 230%:

Ukraine has the same problems as Belarus. But in addition, the currency board mechanism operates in Ukraine, which stifles the country's economy. And what to export to Europe? Not hryvnia.

The situation with the stability of exchange rates is bad not only among the CIS countries. So exchange rate hyperinflation in Venezuela in 2018 amounted to more than 2,480,000%:

Venezuela was once one of the largest oil exporters. Clueless economic policy hooked the country on the oil needle. The rest of the economy has atrophied as unnecessary. Falling oil prices and competition in the oil market led to the collapse of the economy. The government is trying to solve problems in the easiest way - with the help of a printing press. The Russian authorities are following the path of Venezuela: they put the country on an oil needle and refuse to develop their own industry. Of course, the legacy of the USSR can be eaten up for a long time, but the prospects seem very depressing.

Inflation in Argentina has been over 950% since 2010:

Argentina is a large American country, rich in resources, with a good climate. Corruption, stupid economic policy, government access to the printing press - the result is natural. In 2018, Argentina got into the IMF debt noose. The government spends money on foreign exchange interventions, reducing the circulating money supply. Further it will be worse.

Inflation in Turkey has been over 380% since 2010:

Turkey is a member of NATO, a partner of the EU, but has a lot of problems with the economy:

The high interest rate of the native Central Bank stifles the local economy and makes loans in lira unprofitable.
Local businesses took out loans in dollars, and the Fed's rate began to rise.
Heavy dependence on imported goods and imports of resources leads to increased demand for currencies.

As a result, the lira fell and will continue to fall.

From what has been written above, only one conclusion can be drawn: never keep all your savings in the national currencies of countries in which governments have access to a printing press or whose central banks operate in the curency board mode. The probability of long-term depreciation of the currencies of such countries is 99%. Citizens of the former USSR received multiple experiences confirming this conclusion.

For comparison, let's see how things are with the exchange rate fluctuations of the Central Bank-6 cartel:

The Swiss franc collapsed by 28% of its own Central Bank:

The euro exchange rate against the Swiss franc fell by 32%:

The British pound collapsed due to Brexit:

The maximum fall of the pound against the dollar in 7 years was 34%:

For the last 7 years, the euro exchange rate against the dollar fluctuated in the range of 28%:

The maximum weakening of the yen in 7 years was 64%:

As we saw above, the exchange rates of the Central Bank-6 cartel also do not stand still. Their long-term fluctuations average 20-30%. On these fluctuations, you can lose, in case of unsuccessful actions. BUT you can earn, in the case of a competent and correct approach. The correct approach will be discussed in detail below. On average, due to financial illiteracy, decent amounts are lost by people who take student, mortgage and other long-term loans in the currency of another country.

Now suppose that we decide to expand the portfolio and buy additional currencies with a positive interest rate for greater diversification. In the main menu, select "Terms / Currencies":

In the deposit column, we see the annual interest that is charged for the respective currencies. Of course, the stakes are not very high. However, this money will not be superfluous. Therefore, to add to the portfolio, we will choose the pound, Canadian and Australian dollars. We increase the weight of the euro and the dollar in the portfolio:

In column "O" we see what amounts we need to purchase. From the current calculation, it is not immediately clear which transactions need to be converted. Part of the dollars can be spent to buy the pound. Part for the purchase of other currencies. As far as possible, in the future I will improve the table so that the algorithm immediately shows what transactions need to be made with the corresponding currency pairs and amounts. In the meantime, we will simply, in order, first spend dollars for conversion, then euros. This will require some simple calculations.

To buy 1411 GBP we need 1411 * 1.2926 = 1823 USD. Convert 1823 dollars to pounds. Next, I will skip the screenshots with the transaction forms, since they, in fact, repeat the transactions that have already been discussed several times above.

The result of the conversion will be like this:

Of the 2791 dollars intended for sale, we spent 1823. To buy CAD, we need the same amount in dollars: 2229 / 1.3146 = 1824 USD. We have already sold 1823 USD out of 2734 USD for sale. Therefore, we will spend 2734 – 1823 = 911 USD to buy CAD:

Out of the estimated 2399 CAD, after purchasing 1194 CAD, we still have to buy 1205 CAD already for the euro:

Now it remains to buy for the euro 2534 AUD:

Next, we update the quotes in Excel and save the portfolio state:

If desired, we correct small discrepancies in the portfolio amounts in Excel so that they match the data. Such small discrepancies arise due to changes in rates in the course of transactions. They don't play a big role.

Above, we looked at depositing money and creating a portfolio, withdrawing money from a portfolio, and expanding a portfolio. Removing an asset from a portfolio or changing the weights of assets in a portfolio is done in a similar way. In terms of portfolio management, it remains for us to consider the impact of exchange rate fluctuations on changes in the relative value of assets within the portfolio.

Let's assume the euro exchange rate rose from 1.1624 to 1.2500:

In column "O" we see that the 157 EUR that has risen in price can be converted into other currencies to equalize their value against other currencies. You do not need to do this, since such changes in relative value occur constantly due to changes in rates. The appreciation of the euro against the dollar shows that if you need to withdraw money from the portfolio, you can withdraw more euros. Thus, the profit from the purchase of the euro will be fixed. If we need to invest additional funds in the portfolio, then we will see the following calculation:

The correction amount of 171 EUR is equivalent to 213 USD. While we invest larger amounts in other currencies than in the euro. The appreciation of previously purchased euros automatically reduces the amount for investments in euros and increases the amount for the purchase of cheaper currencies. That is, we buy in a larger volume what has fallen in price and in a smaller volume what has risen in price. Which is what we need.

In the last example, we allocated 58% of the deposit to the dollar and euro. The rest of the money was invested in the pound, Australian and Canadian dollars. Such shares have been chosen simply as an example. When creating your portfolio, the choice of shares must be taken seriously and proceed from those goals that are most relevant to you. For example, for residents of the EU, it may be very important to include the euro and the pound in the portfolio. And for some residents of Russia, the ruble, dollar and euro may well be enough.

The IMF in 2018 in special drawing rights, which are a kind of analogue of a portfolio of currencies, used the following portfolio structure in 2018:

When allocating weights in a portfolio, one can take into account the experience of the IMF:

The choice of weights of assets in the portfolio so far depends on your preferences and goals. On the history of quotes, you can try to calculate the optimal options for the distribution of assets and portfolio weights. But keep in mind that this will be just an adjustment to the story. I think, nevertheless, one should not confuse the purpose of creating a portfolio to protect against currency fluctuations from the purpose of generating additional income due to exchange rate fluctuations.

If you have interesting ideas about portfolio structure or asset weights, please share them in the comments.

Using additional features of TradeRoom.

The ideas and features described below are not mandatory for understanding and mastering. If this article has already "loaded" you, you can safely proceed to the conclusion. Professional Forex traders will be interested to know about some of the opportunities and known patterns of the dynamics of major currencies, which can be used to gain additional benefits while working with a portfolio.

The article discusses the average dimensions of currency fluctuations. These fluctuations can be used to minimize costs. With the help of pending trailing orders with the dimensions of statistical pullbacks, we can make pending conversion trades in order to get better prices than are in the market at the time the order is placed.

For example, we want to buy the euro at a price 150 points better than it is now. To do this, we place a pending trailing order to buy the euro:

We indicate the purchase amount of 5000 EUR, the relative purchase rate = -150 means that we want to buy when the price drops by 150 points and the purchase price is better than it was at the time the order was placed. In the "Trailing" tab, enable the checkbox of the same name so that the order follows the price. Perhaps we will win because of the pullback down, perhaps not. But the probability of getting the best price in the end, in my opinion, is greater than the probability of getting the worst price.

In the "Additional" tab, it is necessary to indicate that the transaction type is "Conversion". If the transaction type is not changed, a margin transaction will be opened, which will need to be closed with a reverse transaction and the purchased euros will not be available for withdrawal from the account.

Pending orders can be used to buy currencies at the best prices based on long-term forecasting of exchange rate fluctuations. Consider the fluctuations of the major currencies against the dollar as a percentage and try to guess what will happen in terms of maintaining the current state of affairs in the future:

The EUR/USD exchange rate has fluctuated in the range of 15.4% since 2015. When approaching the upper limit of this range, you can take profits on the euro, if the euro was bought at the lower limit of the range. When approaching the lower border of the range, you can buy more euro.

Since 2012, the Swiss franc has fluctuated in the range of 17.6%. For him, the same approach is relevant as for the euro - the use of the boundaries of the long-term range.

Since 2015, the pound has been in a downtrend. The situation with Brexit may contribute to further weakening of the pound. Perhaps the pound will be locked into the 15.2% range. Setting new lows due to Brexit cannot be ruled out. You can use the 2018 high as the pound selling level and the 2016 low as the pound buying level.

The yen has been in the 30% range since 2015. Until the Japanese stock market collapses, we can assume that this range will continue to be maintained and use its boundaries.

The Australian dollar is inside the 15% range. It can be assumed that this range will continue to be maintained.

The New Zealand dollar is inside the 19% range. It is also possible to assume the further preservation of this range.

The Canadian dollar has several long-term downward waves. A long-term downtrend is possible. The 17.3% range may remain or be broken down. In such conditions, it is hardly worth trying to gain something for a portfolio of currencies.

Gold has been in the 20% range since 2014. Its boundaries can be used to fix profits or increase investment volumes.

You can try to use long-term charts and range boundaries to increase the return on a portfolio of currencies, increase the weights of certain assets. There is not much to win or lose on this, since a portfolio of currencies without leverage is not a speculative instrument. Nevertheless, the use of long-term charts will be interesting and useful for someone.

Conclusion.

Above, we looked at the reasons why it is necessary to use a portfolio of currencies to protect money from loss of purchasing value due to exchange rate fluctuations. We analyzed in detail the methodology for creating and maintaining a foreign exchange portfolio. There is nothing difficult in this. The portfolio support option is open to everyone. You can use cash, bank accounts or broker accounts. For Forex traders, a broker account allows you to use a portfolio of currencies as a margin collateral. This is a handy feature that can be quite useful.

In this article, we did not consider the topic of hedging currency risks in business. This topic is discussed in detail on the website in the article "Hedging of currency risks in foreign trade operations". Those who wish can familiarize themselves with this material if this topic is relevant to them in connection with their business.

As far as possible, the material will be supplemented and improved. I inform about updates of the material in mailing lists to registered visitors of the site. If you have questions or need help, please feel free to comment.