This notice summarises the key risks associated with foreign exchange markets, currency research and hedging. It does not describe every risk. If you are unsure whether any strategy is suitable for you, please speak to us or an independent adviser.
1. Currency markets are volatile
Exchange rates can move sharply and unpredictably in response to economic data, central bank decisions, political events and changes in market sentiment. Moves can happen quickly, including outside normal business hours.
2. Research and forecasts are not guarantees
Our research reflects our analysis and opinion at a point in time. Markets may move against our views, and forecasts may prove wrong. Past performance and past forecasts are not reliable indicators of future results.
3. Hedging does not remove all risk
Hedging can reduce the impact of adverse currency movements, but:
- a hedge can mean you do not benefit if the market moves in your favour (opportunity cost);
- if the underlying transaction changes, is delayed or cancelled, you may be left with a hedge that no longer matches your exposure, which may result in a loss;
- hedging instruments have costs, including forward points, option premiums and spreads.
4. Forward contracts
A forward contract is a binding agreement to exchange currency at a fixed rate on a future date. You will be obliged to settle it regardless of the market rate at the time. Providers may require an initial deposit or margin, and may require further funds if the market moves against the contract before settlement. If further funds are not provided, the contract may be closed early at a loss.
5. Options and structured products
Currency options and structured strategies can be complex. Buying options involves paying a premium, which may be lost in full. Some structured strategies can create obligations that increase your exposure in certain market conditions. These products are only suitable for clients who fully understand them and are eligible to use them.
6. Leverage
Some instruments allow exposure larger than the funds deposited. Leverage magnifies both gains and losses, and losses can exceed initial deposits.
7. Counterparty and settlement risk
Hedging transactions are entered into with third-party banks and liquidity providers. If a counterparty fails, you may suffer loss or delay. Cedarstone Research does not guarantee the performance of any counterparty.
8. Liquidity risk
Some currencies, particularly in emerging markets, may be less liquid, with wider spreads, restrictions on convertibility or difficulty closing positions.
9. Emerging markets and currency pegs
Emerging market currencies can be subject to political, economic and capital-control risks. Pegged currency regimes can be adjusted or abandoned, sometimes suddenly, resulting in large moves.
10. Shariah-compliant structures
The Shariah compliance of any structure is determined by the relevant Shariah advisers or boards. Opinions may differ, and Cedarstone Research does not give Shariah rulings. Such structures carry the same market risks as their conventional equivalents.
11. Tax
The tax treatment of currency transactions depends on your circumstances and jurisdiction and may change. We do not provide tax advice.