Risk Disclosure Statement for Currency Spot and Options Markets
This brief statement does not disclose all of the
risks and other significant aspects of trading in currency spot and options
markets. In light of the risks, you should undertake the transactions
only if you understand the nature of the contracts (and contractual relationships)
into which you are entering, and the extent of your exposure to risk.
Trading in spot and options markets is not suitable for many members of
the public. You should carefully consider whether trading is appropriate
for you in light of your experience, objectives, financial resources,
and relevant circumstances. Some studies have shown that more than eighty
percent of investors who trade in spot or options ultimately lose money.
Currency Spot Market
1. Effect of "Leverage" or "Gearing"
Transactions in currency markets carry a high degree of risk. The amount
of initial margin is small relative to the value of the currency spot
contract, so that transactions are "leveraged" or "geared."
A relatively small market movement will have a proportionately larger
impact on the funds you have deposited or will have to deposit; this may
work against you as well as for you. You may sustain a total loss of initial
margin funds and any additional funds deposited with the firm to maintain
your position. If the market moves against your position or your margin
levels are increased, you may be called upon to pay substantial additional
funds on short notice to maintain your position. If you fail to comply
with a request for additional funds within the time prescribed, your position
may be liquidated at a loss and you will be liable for any resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g. "stop-loss" orders, where
permitted under local law, or "stop-limit" orders) which are
intended to limit losses to certain amounts may not be effective because
market conditions may make it impossible to execute such orders. Strategies
using combinations of positions, such as "spread" and "straddle"
positions may be as risky as taking simple "long" or "short"
positions.
Options
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers
of options should familiarize themselves with the type of option (i.e.
put or call) which they contemplate trading and the associated risks.
You should calculate the extent to which the value of the options must
increase for your positions to become profitable, taking into account
the premium and all transaction costs. The purchaser of options may offset,
or exercise the options, or allow the options to expire. The exercise
of an option results in a cash settlement. If the option is on a spot
currency contract, the purchaser will acquire a currency position with
associated liabilities for margin (see the currency spot market section
above). If the purchased options expire worthless, you will suffer a total
loss of your investment, which will consist of the option premium, plus
commissions and transaction costs. If you are contemplating purchasing
deep-out-of-the-money options, you should be aware that the chance of
such options becoming profitable ordinarily is remote.
Selling ("writing" or "granting")
an option generally entails considerably greater risks than purchasing
options. Although the premium received by the seller is fixed, the seller
may sustain a loss well in excess of that amount. The seller will be liable
for additional margin to maintain the position if the market moves unfavorably.
The seller will also be exposed to the risk of the purchaser exercising
the option, and the seller will be obligated to either settle the option
in cash, or to acquire to deliver the underlying interest. The seller
of the option will acquire a position in the spot market; with associated
liabilities for margin (see the section on currency spot market above).
If the option is "covered" by the seller holding a corresponding
position in the underlying interest, or a spot contract, or another option,
the risk may be reduced. If the option is not covered, the risk of loss
can be unlimited. The purchaser of the option is subject to the risk of
losing the premium, commissions, and transaction costs.
Additional risks common to currency spot and options markets.
4. Suspension or restriction of trading and pricing relationships
Market conditions (e.g. il liquidity) and/or the operation of the rules
of certain markets (e.g. the suspension of trading in any contract or
contract month because of price limits or "circuit breakers")
may increase the risk of loss by making it difficult or impossible to
affect transactions or liquidate/offset positions. If you have sold options,
this may increase the risk of loss.
5. Deposited cash and property
You should familiarize yourself with the protections accorded money or
other property you deposited for domestic and foreign transactions, particularly
in the event of a firm insolvency or bankruptcy. The extent to which you
may recover your money or property may be governed by specific legislation
or local rules. In some jurisdictions, property which had been specifically
identifiable as your own will be pro-rated in the same manner as cash
for purposes of distribution in the event of a shortfall.
6. Commissions and other charges
Before you begin to trade, you should obtain a clear explanation of all
commissions, fees and other charges for which you will be liable. These
charges will affect your net profit (if any), or increase your loss.
7. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally
linked to a domestic market, may expose you to additional risk. Such markets
may be subject to regulation which may offer different or diminished investor
protection. Before you trade you should enquire about any rules relevant
to your particular transactions. Your local regulatory authority will
be unable to compel the enforcement of the rules or regulatory authorities
or markets in other jurisdictions where your transactions have been effected.
You should ask the firm with which you deal for details about the different
types of redress available in both your home jurisdiction and other relevant
jurisdictions before you start to trade.
8. Trading Facilities
Most open-outcry and electronic trading facilities are supported by computer-based
component systems for the order-routing, execution, matching registration,
or clearing of trades. As with all facilities and systems, they are vulnerable
to temporary disruption or failure. Your ability to recover certain losses
may be subject to limits on liability imposed by the system provider,
the market, the clearing house, and/or the banks. Such limits may vary;
you should ask the firm with which you deal for details in this respect.
9. Electronic Trading
Trading on an electronic trading system may differ not only from trading
in an open-outcry market, but also from trading on other electronic trading
systems. If you undertake transactions on an electronic trading system,
you will be exposed to risks associated with the system, including the
failure of hardware and software. The result of any system failure may
be that your order is either not executed according to your instructions,
or is not executed at all.
10. Additional Disclosure
The firm with which you deal may be acting as your counter-party to the
transaction. For this reason, these transactions may involve increased
risks. Spot currency market transactions may be less regulated, or subject
to a separate regulatory regime. Before you undertake such transactions,
you should familiarize yourself with applicable rules and attendant risks.
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