CFD Currency Indices

Currency Indices

Currency Indices provide an alternative format to traditional FX trading, by offering a portfolio approach which tracks the economic performance of a specific currency against a defined group of other currencies. This represents another way to take advantage of the largest financial market in the world and can provide long-term returns comparable to the more popular assets - such as bonds and equities. A traditional currency pair is based simply on the relationship between one currency and another, e.g. the Japanese Yen against the US Dollar. Currency Indices are based on several of these relationships, e.g. the Japanese Yen, the New Zealand Dollar and the Australian Dollar against the US Dollar. Currency Indices are available for 10 major currencies: USD, EUR, JPY, GBP, CHF, AUD, NZD, CAD, NOK and SEK, and will be available during standard CMC FX trading times: 21:00BST Sunday - 22:00BST Friday

Instrument Overview

Currency Indices are a CFD derivative whose price is based on a number of FX relationships, i.e. the price of the Currency Index is derived from the relationship between one currency and a basket of underlying currencies. CMC will offer these instruments as a fixed quarterly forward contract that is rolled over towards the end of expiry. The benefits of these instruments include:

• As they are often based on currencies from a geographic region, Currency Indices can provide an effective way to take a view on the economic performance of a particular area
• Factors which can severely effect a two currency FX price may be less likely to have such a large effect on the diversified currency trade afforded by a Currency Index
• The portfolio of currencies in a Currency Index means that traders do not have to execute or monitor individual currency rates or multiple positions
• Currency Indices can be used to provide a valuable indication of market performance which can be used to shape future investment strategy

Components & Weighting

Currency Indices have been an actively traded financial markets instrument for many years, particularly by Central Banks. In most instances they are weighted according to the exports and imports of goods by a country, called a Trade Weighted Index (TWI). Weighting the currency index in this fashion makes the TWI an indicator of a country's international competitiveness and a measure of a currencies performance free of bilateral trends.

The weighting of each component currency in a CFD Currency Index, is derived from the weightings used in the corresponding central bank's Trade Weighted Index. The CMC instruments are narrower versions of the actual Central Bank TWIs, and are calculated as geometric averages - using the same construction methodology as the Central Banks to ensure that performance over time between the two is highly correlated. The component currencies of each Currency Index are illustrated below:

Trading a Currency Index

You wish to trade the Euro Currency Index, believing it will strengthen against the currencies which are in the basket (USD, JPY, CHF, GBP and SEK).

We are quoting the Euro Index at 101.75/85 and you purchase 1 x CFD EUR Index contract @ 101.85

In this case, the Euro appreciates against the currencies in the basket to 102.15/102.25 and you wish to close the position. You sell 1 x CFD EUR Index @ 102.15 resulting in a profit of €300**, calculated as follows:

(Sell Price - Purchase Price) x number of contracts x 1000 = Profit/Loss

(102.15 - 101.85) x 1 contract x 1000 = €300 Profit

Of course, had the Euro weakened against the other currencies, you would have made a corresponding loss. ** The profit or loss on a CMC CFD Currency Index trade is always expressed in the base currency of the basket. For example, a position in the EUR Index will result in a profit or loss in EUR.