Diversify Currency Speculation

With the US Dollar Index

Who are we?

Carley Garner1-866-790-TRADE (8723)cgarner@decarleytrading.com

www.DeCarleyTrading.com

Twitter: @carleygarnerFacebook: DeCarley Trading(http://www.facebook.com/decarleytradingcommoditybroker)

There is substantial r isk of loss in trading futures, options and FOREX!

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What is the US Dollar Index?

• The “oddball” of currency futures– Traded on the ICE Exchange

(InterContinentalExchange)

• The “only” diversified currency product– The ETF of currency futures

What is the US Dollar Index?

• According to ICE:– “Leading benchmark for the international

value of the U.S. Dollar and the world’s most widely recognized currency index”

What is the US Dollar Index?

• Represents the value of the greenback against a basket of currencies rather than a single currency

• Diversified speculation• Hedge currency risk of international stock and

bond portfolio• Less volatile alternative to gold and silver

What is the US Dollar Index?

Why the US Dollar Index?

• One of the most underrated products on the board?– Often overlooked because it is different• Not on CME• Index, not single asset

– Humans migrate to comfortable, but what is easy isn’t always best

Dollar Index Specs• Symbol – IDX, EDX, DX (depending on platform)• Contract value = $1,000 x index price– @ 78.50 = $1,000 x 78.50 = $78,500

• Tick value = $10– Minimum price change half tick– Rally from 78.555 to 78.650 = 9.5 ticks or

$95• Margin = $1,320 (subject to change)

DX mitigates country r iskMarket Risk (macro)

• Interest rate risk• Economic risk

Country Risk (micro)

• Natural disasters specific to particular country– Yen and Japanese

earthquake

• Political/Central bank risk

Mitigate Micro Risks

• If your goal is to mitigate country risk, and gain exposure to market risk (macro), simply trade the DX outright– Long or short position in USD vs. major global

currencies• No need to construct similar FX holdings through

trading of multiple pairs– KISS (Keep it Simple Stupid)

What is hedging?

• Trading a position in a like or similar asset to reduce the risk of adverse move in another asset– Conventional use of term in FX is different:• Holding both long and short positions in the same

pair in the same trading account– No financial benefit to trader

“Hedging” Strategy in FOREX

• “Hedging” in FX isn’t hedging at all, it is completely eliminating market risk on all “hedged” contracts rather than simply mitigating it. With risk elimination comes elimination of profit potential.– Equivalent to being flat!– Banned by the NFA for U.S. clients• Because only beneficial for brokers

Isolating Country Risk

• Take opposite position in DX than is being held in FOREX pair to mitigate market risk and focus on country specific risk– Go long 100,000 units of EUR/USD• Notional value $163,750 @ $1.3100

– Sell 1 US DX• Notional value $80,000 @ 80.00

– Roughly 57% is made up of Euro ($45,600)

Result of 1 to 1 hedge

• Trader is net long about $118,150 worth of Euro vs. $163,750– Trader is also long the other major currencies

in various amounts vs. the U.S. Dollar• Works toward mitigating macro global economic

risk– Focus becomes micro (relationship between Euro and

Dollar)– Eliminates some of the noise