Foreign Exchange Investments Discover the World of Currencies. Private Banking USA

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1 Foreign Exchange Investments Discover the World of Currencies Credit Suisse Securities (USA) llc Private Banking USA

2 2 Foreign exchange: There s no ignoring the largest market in the world.

3 Introduction Take Advantage of New Investment Opportunities Have you ever thought of foreign exchange as a completely separate asset class? Why not discover the benefits foreign exchange investments can offer you? Just like equities or bonds, foreign exchange investments can also meet your financial needs. Would you like to diversify your portfolio, try to improve your returns or hedge against currency risks? A large majority of investment portfolios are based on three pillars: liquidity, which is invested for the short term in the money markets; bonds, which generally ensure an income stream; and equities, which aim for value growth. In many cases, these components are supplemented by a real estate investment such as a residential property or alternative investments such as hedge funds. However, a changing interest rate environment and highly volatile stock markets have shown that these investment categories may not be enough to ensure optimum portfolio diversification. During the stock market boom in the 1990s and the credit crunch of 2007, insufficient attention was often paid to investment risks. The market correction that followed led investors to place a greater emphasis on investment opportunities that spread risk more effectively and provide alternative sources of returns. In addition to alternative investments such as commodities, foreign exchange is attracting more and more attention. For example, investors want to profit from emerging markets in Asia, Eastern Europe or Latin America from higher bond yields in the European Union, or from rising real estate markets in the Far East. Such investments entail currency risks since exchange rate movements can severely impact the returns of investments in foreign currency. Today, these risks can be professionally hedged using foreign exchange investments. Foreign exchange is a separate asset class that can provide returns that are not correlated with stock market trends. Credit Suisse Securities (USA) LLC or its affiliates offers to suitable clients a broad range of foreign exchange instruments that are designed to anticipate rising, falling, or stable exchange rates to achieve your financial goals. The following pages provide an overview of investment opportunities in the currency markets, and how you may be able to take advantage of them. 3

4 Currency Market An Eye for Detail Helps to Reveal the Big Picture Currency markets are largely uncorrelated with stock market developments. A detailed picture can help you significantly optimize your portfolio. Currency Markets The foreign exchange market exists wherever one currency is traded for another. It includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Gross Domestic Product Gross domestic product (GDP) is the measure of a country s economic performance. It represents all available goods and services generated within an economy over a specific period. Balance of Trade The balance of trade is the statistical difference between imports and exports of all goods in an economy over a specific period. If total exports exceed total imports, this is termed a trade surplus and if imports are greater than exports, this is called a trade deficit. Foreign exchange is the world s largest and most actively traded market. Each day more than USD 3 trillion change hands. This is only possible because of the market s professional and efficient organization. Moreover, the currency market is becoming more and more transparent, despite its size. Globalization is integrating the global economy, and there are fewer and fewer pegged exchange rates. The number of nontradable currencies is also declining. This means that, in addition to traditional currencies, new investment opportunities are also emerging in growth markets such as Asia and Latin America. Investing in foreign exchange means investing in the economic development of a country or group of countries. Factors such as GDP development, trade balances, interest rates, industrial output, and the political stability of a country or region all have a decisive effect on exchange rates. Foreign exchange investments are no longer the preserve of large investors. Since the minimum amounts for foreign exchange investments are falling, private investors can increasingly take advantage of the opportunities offered by these products. Investment horizons can range from a single day to several years. As a separate asset class, foreign exchange investments make an ideal portfolio supplement. They offer investors attractive instruments with which to actively manage their portfolios. 4

5 Currency Market The Currency Market at a Glance The largest market in the world Average daily turnover: 3,200 billion USD Global market active 24 hours a day Highly efficient market; narrow spreads between bid and offer prices Largely uncorrelated with other asset classes, e.g. stocks, bonds 5

6 Returns and Security A Unique Blend of Risks and Returns The name of the game is independence: By using foreign exchange investments to diversify your portfolio, you can seek to optimally hedge currency positions and tap into new sources of potential return. Return The amount by which an investment grows as a result of a combination of interest or dividend income and capital growth. Diversification An investment strategy designed to minimize risk and maximize return by distributing the capital invested between different asset classes, companies, countries, sectors, etc. S&P 500 Index Standard and Poor s 500, US equity index based on industrial, utilities and transportation securities listed on the New York Stock Exchange. Foreign exchange investments meet two basic needs: First, by investing in a currency strategy in addition to your existing portfolio, you can increase the yield of short- to medium-term positions. Second, currency positions that have arisen as a result of purchasing foreign stocks, for example, can be hedged using a currencybased investment solution. In both cases, adding foreign exchange investments to your portfolio increases its diversification and may decrease risk, due to their low correlation with the stock markets. For example: In addition to US equities (S&P 500 ), a US investor also invests in euro-denominated securities. Because of the differing and sometimes even contrary development of US equities and the euro (see illustration), the portfolio s risk return profile can be improved. Developments in euro exchange rates and the S&P 500 Index (in USD) EUR in USD S&P 500 Index Source: Bloomberg 6

7 Returns Multiplying Your Investment The currency market offers many opportunities for generating returns using both structured products and direct foreign exchange investments. Structured Products Structured products are securities that relate to financial assets such as equities, currencies, or bonds and that can be combined with derivatives (e.g. options). Capital Protection In the context of structured products, capital protection means a minimum repayment at maturity that is guaranteed by the issuer. Depending on the degree of capital protection offered, the invested capital is protected fully or partially (conditional capital protection). In contrast to equity investments, where a large number of securities are available for each country, the currency market is much more transparent: A few key currency pairs account for a large proportion of the total market. A single investment may give you direct exposure to an entire economy or region. In particular, structured products, a large number of which have currencies as their underlying, offer an opportunity to generate additional returns in a rising, falling or stable currency market. Currency baskets, which provide exposure to a large number of different currencies with the purchase of a single investment, are particularly popular. However, Credit Suisse offers not only yield-oriented products but also currency products featuring capital protection, which preserve your capital even in the case of adverse market developments. Sample Product: CPNs CPNs (Capital Protected Notes) allow you to participate in the upside potential of a currency basket yet at the same time to benefit from capital protection at maturity. The amount repaid depends on the level of capital protection and on the performance of the underlying currencies. If, at the end of the term, they lie above their start values, you will benefit from this positive performance with a specified participation. If the performance of the underlying is negative, repayment will be at the level of the integrated capital protection. Depending on the structure of the product you choose, the levels of capital protection and participation in the performance of the underlying can be above or below 100 percent. 7

8 Security The Right Combination to Achieve Your Goals Investing in foreign assets exposes you to exchange rate fluctuations. Various foreign exchange solutions can hedge this risk in whole or in part. If you restrict your investments to your home market, you are completely dependent on domestic interest rate trends, economic developments, and the domestic stock market. To avoid this cluster risk, many people invest selectively in other currencies. If, for example, US investors want to profit from developments on the Swiss stock markets, they expose themselves to currency risk. They have to buy Swiss francs to buy Swiss shares, and convert them back into US dollars when they sell the shares again. During the holding period the exchange rate for the Swiss franc may rise, but it could also fall. For example, the USD rose from CHF 1.30 to CHF 1.80 in the period between 1995 and 2000, before falling to CHF 0.99 eight years after that. Investors who entered the Swiss market in 1995 made a currency loss of 38 percent over five years. However, investors who entered the market in 2000 made a currency gain of 82 percent in the following eight years. To be able to manage these risks, currency positions should be managed separately. Depending on their requirements and their assessment of the market, customers can seek to hedge their currency risks completely or partially. Credit Suisse can put together a customized solution to meet your needs. 8

9 Success isn t about strength. It s a question of attitude. 9

10 Benefits The Potential Benefits at a Glance Currencies are a separate asset class and offer a wide range of opportunities for more active portfolio management. It pays to take a closer look. Foreign exchange investments may allow you to generate attractive additional yields on money market investments seek to protect foreign currency investments against exchange rate volatility benefit from their diversification effect as against traditional investments Additional benefits offered by currency market investments include: Highly liquid global currency markets Narrow spreads due to high liquidity Flexibility thanks to wide range of currency combinations Broad range of products for short- and medium-term maturities The Potential Risks Like many investments, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all investors. The decision to participate in the FX market should be made only after consulting with your financial advisor FX trading can carry a high level of risk including the loss of your entire initial investment and may be liable for additional losses When selling call or put options the client takes on the risk of potentially unlimited loss It may be necessary to accept a significant loss in order to close out a position You should carefully review the booklet on the National Futures Association website titled: Trading in the Retail Off-Exchange Foreign Currency Market, What Investors Need to Know, available at: 10

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12 Unless otherwise specified, the term Credit Suisse is the global marketing brand name for the investment banking, asset management and private banking services offered by Credit Suisse Group AG. Unless otherwise specified, the term Credit Suisse Private Banking generally refers to the combined capabilities of Credit Suisse Group AG subsidiaries and affiliates that provide private banking services to high-net-worth clients worldwide. The term Private Banking USA generally refers to the private banking business within Credit Suisse Securities (USA) LLC ( CSSU ). The Private Banking USA business in Credit Suisse Securities (USA) LLC is a regulated broker-dealer. It is not a chartered bank, trust company or depository institution. It is not authorized to accept deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority. This material is for informational purposes only and is not intended to be an offer or solicitation to purchase or sell any security or to employ a specific investment strategy. It is intended solely for the information of those to whom it is distributed by Credit Suisse Securities (USA) LLC ( CSSU ). No part of this material may be reproduced or retransmitted in any manner without the prior written permission of CSSU. CSSU does not represent, warrant or guarantee that this material is accurate, complete or suitable for any purpose and it should not be used as a basis for investment decisions. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon or used in substitution for the exercise of independent judgment. Past performance is not a guarantee of future results. CSSU does not provide legal or tax advice. Prior to investing, you should consult your accounting, tax and legal advisors to understand the implications of such investment. Credit Suisse Securities (USA) LLC Private Banking USA Eleven Madison Avenue New York, NY CP09-011C 1106