What is Forex (FX)?

Forex (FX), or foreign exchange, represents one of the diverse asset types available in the global investment market. In addition to the stock market, which is widely familiar to investors, there are also foreign exchange markets, bond markets, commodity markets, etc. Foreign exchange transactions span across various areas, impacting daily life through overseas shopping and travel, influencing multinational enterprise trade, and contributing to exchange risk management in business. Even the management of currency reserves worldwide involves intricate foreign exchange transactions.

The global foreign exchange market operates around the clock, and its highly liquid nature has led to a significant demand for foreign exchange investment, driven by the potential to capitalize on price differences.

Major ways to invest in FX

Spot Market FX Fixed Deposit FX Warrants FX Futures/Option Leveraged FX
Trading methods Bank FX Account, Credit card, Currency exchange shop, etc. Bank FX fixed deposit account Hong Kong stock securities account FX Futures/Options Account FX Margin account
Fees Handling charge Handling charge, early withdrawal of deposit may cause rate penalty Platform commissions and transaction levies Platform commissions and handling fees Platform commissions and handling fees
Leverage No No Yes Yes Yes
Maximum loss Capital invested Capital invested Capital invested Capital invested and collateral Capital invested and collateral
Risk of Margin Call No No No Yes Yes

FX spot market

One of the most direct methods in foreign exchange investment is the buying and selling of currencies on the spot market. For instance, if the Japanese yen drops below the 5.5 level against the Hong Kong dollar, investors may opt to purchase Japanese yen at a lower rate for future travel purpose. If the Japanese yen later appreciates to 5.8 against the Hong Kong dollar, this transaction yields a book profit of around 5%. However, it is essential to note that spot trading lacks leverage and involves exchange fees as well as bid/ask spreads.

FX Fixed Deposit

The United States embarked on a rate hike cycle in 2022 and Hong Kong banks followed the U.S. interest rate hikes. Some investors choose to invest in USD or HKD fixed deposits to earn interest returns. For those investors who are optimistic about a specific foreign currency, such as the pound sterling or the Australian dollar, they can also capture the opportunity of "earning price and interest" through related time deposits. Time deposits, considerably relatively low-risk foreign exchange investments, require investors to lock their funds for a specified duration. It is important to note that Investors may not receive interest rates and could incur handling fees for early withdrawal before the specified expiry date, introducing a degree of inflexibility.

FX Warrants

Similar to warrants linked to the Hang Seng Index and stocks, foreign exchange warrants provide leverage effects. Investors can utilize call warrants and put warrants to capture profit opportunities from the rise or fall of individual foreign currencies with less capital. Participation in the trading of foreign exchange warrants only requires a Hong Kong stock securities account. These warrants are denominated in Hong Kong dollars, eliminating the need to exchange foreign currencies during transactions. The maximum loss is limited to the principal invested and does not involve position cover or forced liquidation.

FX futures and options

Foreign exchange futures involve contracts where buyers and sellers trade foreign exchange at a pre-determined price and time. Options, on the other hand, grant the buyer the right to buy or sell foreign exchange at a pre-determined time and price. Investing in foreign currencies in futures or options presents an opportunity to lower the capital threshold. However, it requires opening a futures or options account, which comes with margin requirements. It’s crucial to note that if you misjudge market movements, your margin may be called (position cover), or you could be forced into liquidating the position, so the risk is relatively high.

Leveraged FX

Leveraged foreign exchange contracts, traded on margin, currently operate with a minimum opening deposit level of 5% of the value of each foreign currency contract in Hong Kong. This structure allows for a leverage ratio of up to 20 times. While utilizing the "leverage effect" in foreign exchange investment can amplify potential returns, it simultaneously magnifies potential losses. This increased risk is underscored by the possibility of margin calls (position cover) or even forced liquidation, making it a relatively high-risk investment method.

The above information provided by J.P. Morgan Securities (Asia Pacific) Limited ("J.P. Morgan") is for information and discussion purposes only and is not intended as an offer, invitation, inducement, advice, recommendation or solicitation for the purchase or sale of any above-mentioned listed structured products or financial instruments nor does it constitute a commitment by J.P. Morgan or its affiliates ("J.P. Morgan Group") to enter into any transaction. Past performance is not indicative of future results. There can be no assurance that future results or events will be consistent with any opinions, forecasts or estimates herein.
FX warrants (or currency warrants) are non-collateralised structured products. The price of the structured products may fall in value as rapidly as it may rise and investors may sustain a total loss of their principal invested. J.P. Morgan does not act as a fiduciary for or an advisor to any investor and is not responsible for determining the legality and suitability of an investment in any products or financial instruments by any prospective purchaser or existing holders. Investors must make their own risk assessment and where necessary, seek professional advises. Investor should not invest in these structured products unless they carefully read and understand the terms and conditions, risk factors and other information as set out in the relevant listing documents, and fully understand the features of the structured products and are willing to assume the risks associated with them.