Foreign Exchange Position (forex)

For purposes of financial disclosure, “foreign currency” is the official currency of a country other than the United States.  It is possible to hold a foreign currency through a “foreign exchange” transaction.

A foreign exchange transaction results in the purchase of one currency for investment purposes and the simultaneous sale of another.  This constitutes an open position that is later offset to terminate the position.  Both the short and the long position must be offset to close out the holding.  One may take a position in a foreign currency for speculation or for hedging purposes.  The increase or decrease in the exchange rate between the two currencies may result in a profit or loss.

A foreign exchange transaction always involves a currency pair of which the first listed is the “base currency” and second is the “quoted currency.”  For example, in the U.S. Dollar-Japanese Yen pair, the U.S. Dollar is the base currency and the Yen is the quoted currency.

The investor is always long one currency of the pair and short the other.  This process happens through a foreign exchange broker, who bankrolls the entire transaction by supplying all the currencies in the exchange.  So, for example, if the investor anticipated that the Dollar was going to appreciate versus the Yen, the investor could buy the Dollar and short the Yen.  The investor borrows the Yen from the investor’s broker and then sells the borrowed Yen (creating the short position) and simultaneously buys the Dollar (creating the long position).  In this example, the broker would charge the investor interest on the Yen that the broker lent, and the broker would pay interest on the Dollar, which the investor owns but which the broker holds.