FOREX: Currency risk and leverage
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.
Investor.gov · Foreign Exchange Trading ↗Check your understanding
If an asset in dollars rose, did its value in shekels necessarily rise?
- Yes
- No, the currency rate also affects it
- Only in tech assets
Answer and explanation
No, the currency rate also affects it. Value in shekels depends on both the asset price and the exchange rate.
In this FX exercise you can…
- Borrow 100 times the balance
- Convert virtual free money without leverage
- Sell without holding
Answer and explanation
Convert virtual free money without leverage. This is an exercise in holding currency only; there is no credit, leverage or shorting.
Continue learning
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.
Spot rate, buy rate and sell rate — The quoted (spot) rate is an informational indicator. It is not a promise of the price at which a bank or currency service will execute a transaction.