Currency Investing Lesson #2
By
Gary Scott

Most investors are always alert for ideas on how to gain profit. Yet few know much about currency investing basics.

The first rule of currency investing basics is to look at risk as well as potential profit. Only when you face potential rewards and risks can you make a truly sound currency investing basics investment decisions. This special report begins by looking at ways to view currency investing basics risk. Then future lessons look at what I have written about the Multicurrency Sandwich over the past five years.

This second lesson is updated (March 17, 2005) from currency investing basics I posted at my GaryScott.com website in September 2000.

Currency Investing Basics Recommendations

The question posed in Lesson #1 of Currency Investing Basics was how to protect against a falling U.S. dollar.

In the 70s and 80s my recommendation would have been to look for diversification in German marks, Swiss francs or Japanese yen. Today these options are not so viable. The yen appears overvalued and the return offered on yen investments is almost zero. German marks are now wrapped into the Euro. The Swiss franc, though not part of EMU (European Monetary Union) is practically linked (because the Swiss must export to survive with half their exports going to Germany ) as well.

We have to be more sophisticated in our currency diversification. We have to diversify more broadly and nibble around the fringes of the Euro. Because of this in 2000, I suggested a speculative diversification into seven currencies; the Polish zloty, Hungarian florin, Slovakian kroner, Euro, Mexican peso, Norwegian kroner and Turkish lira.

Furthermore I suggested that one consider leveraging this diversification with a yen loan to create a Multicurrency Sandwich.

Currency Investing Basics Multicurrency Sandwich Year 2000

The Multicurrency Sandwich portfolio recommended offered 52.76% of potential profit using an existing $100,000 asset (which has a 6% yield) as shown in the example below. This portfolio was based on a $100,000 investment added to Japanese yen loans of US$400,000 at 1.5% for investment into the seven currencies.

Here is how this diversification worked.

Currency - Investment - Return - Yield

US$100K Original Asset in AAA investment 6.00% $6000

US$ 50K General Electric Polish Zloty Bond AAA 11-2-0 17.06% $8530

US$ 50K Hungary Gov’t Florin Bond A1/A 12-1-01 10.30% $5150

US$ 50K IFC Slovakian Kroner Bond AAA 10-8 8.72% $4360

US$ 50K Argentina Gvt Euro Bond B1/B+ 6-02-03 8.28% $4140

US$ 50K Brazil Government US $ Bond B1/B 5-11-01 8.39% $4195

US$ 50K Mex. Gvt 3 Month Peso Cetes Bond Baa3/BB 14.00% $7000

US$ 50K Norway Gvt NOK Kroner Bond AAA 31-05-01 6.77% $3385

US$ 50K Turkish Gvt Lira 3 Month Bond B1/B 32.00% $16000

US$400K Japanese yen loan interest minus 1.50% $6000

Total return on initial $100,000 at risk $52,760

Yielding 52.76% on the $100,000 at risk

This portfolio diversifies into eight currencies, nine countries and increases potential earnings by almost five times. But the portfolio also creates substantial risks.

The purpose of the first lessons of this FREE course on currency investing basics is to show how to assess this risk as well as profit.

We’ll learn more on this in the third lesson that follows.

Gary Scott

Join Gary Scott and Jyske Bank at an International Investing and Business Course. Details are at GaryScott.com

To learn more about Gary Scott go to GaryScott.com

To understand currencies you need to understand countries.

Learn more about England and the British pound at Answers.com/topic/united-kingdom

Jyske Bank specializes in currency investing basics. Attend Jyske investing seminars in Copenhagen. Details available from Thomas Fischer at FISCHER@jyskebank.dk