State which currency is being bought, what you are paying with, and what will happen if its rate falls.
Currency risk is a change in value because of an exchange rate movement. Leverage increases exposure relative to the money invested.
A currency can strengthen or weaken due to interest rates, expectations, trade and events, without being predictable with certainty. In leveraged trading a small move can cause a large loss and even exceed the initial amount depending on the product. A derivatives account is not the same as simply holding a currency. In the workbook we practice holding without leverage: you pay the full cost in shekels, there is no loan and no selling of currency not held in the portfolio.
In this exercise only, a stock priced in dollars rose 10%, but the dollar fell 10% versus the shekel: 1.10×0.90=0.99. The value in shekels fell by about 1% before costs, despite the stock rising.
State which currency is being bought, what you are paying with, and what will happen if its rate falls.
A fictional asset costs 100 foreign units, with an exchange rate of three local units per foreign unit. Its starting local value is 300. Later, the asset rises to 110, but the exchange rate falls to 2.5, giving a local value of 275. The asset’s rise did not prevent a local loss. Examine asset and currency changes separately, then calculate their combined effect before taxes and costs excluded from this example.
Concepts that help you compare
FX: What’s the price of a dollar?
FX means foreign currency. An exchange rate describes how many units of one currency equal one unit of another currency. In the pair USD/ILS the dollar is the base currency and the shekel is the quote currency: the number tells how many shekels one dollar costs. EUR/USD shows how many dollars one euro costs. A rise in the pair means the base currency strengthened relative to the quote currency. FOREX is the foreign exchange market; converting money for travel is not the same product as trading leveraged derivatives.
Comparison example: For example only, USD/ILS = 3.60: buying 100 dollars costs 360 ₪ before costs. If the rate falls to 3.40, the same 100 dollars are worth 340 ₪.
Leverage is increasing exposure using debt or another mechanism. It can magnify both gains and losses relative to the money you invested yourself. The debt and interest do not disappear when the asset falls. In some situations you can lose more than your equity and be required to add money or sell. The lesson demonstrates risk; this is not leveraged trading.
Comparison example: You have 100 ₪, you borrow another 100 and invest 200. After a 25% drop the asset is worth 150. After repaying the 100 debt there remain 50, before interest: a 50% loss on your money.