EWJ: Why You Should be Aware of Foreign Currency

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Americans are so used to having a globally dominant currency that I think we sometimes forget that the U.S. dollar is just another social contract. Like every other "store of value," it is only worth whatever goods or services someone else will give us for it. I lived in Scotland for a little while, and I remember being struck by how much more aware friends there were of other currencies and exchange rates.

Currency pairs and related assets can get confusing sometimes, so I thought I would explain the details of Japanese Yen-linked assets for readers who don't regularly look at foreign exchange markets. A long iShares MSCI Japan Index (EWJ) position is one of my picks for 2013, and tomorrow I want to take a closer look at JPY/USD volatility skew because there's something instructive going on there.

Here are the main assets you should know about.

JPY/USD futures and options on those futures trade at the CME. The current contract, for December 2012 expiration, is priced at 0.012194, which means that if you give me $0.0122 cents, I'll give you ¥1 in return. A mental trick to make sense of the price quote for any X/Y pair is to think, "If I give the market one X, how many Ys can I get in return?"