No Trading Asset Is An Island! – Part 1

As the saying goes “no man is an island”. In the same way, it seems no stock is an Island. At least not in the trading world. If you trade you have got to factor the mind of the market traders. It is unpredictable!

What are the characteristics that point us to the fact that an asset is not an island? Risk everywhere! Let us use a well know stock as an example. Apple (AAPL) does not manufacture its own batteries, apple supplier list. In fact, it does not manufacture a host of its parts itself. Hence it is dependent on all these countries for the delivery of its product.

What does this mean? Well, first of all, countries of suppliers reside in countries outside Apple’s reporting country. We have some in the United States, Japan, Korea, China, and Taiwan as an example.

Firstly, this means Apple is exposed to currency risk against the foreign suppliers’ countries. So if you trade Apple you will need to de-risk these exposures by hedging in some way.

Secondly, you have a political risk. In recent months we have seen the trade wars between the United States of America and China. Compare timeline with price around that timeline. Notice the price swing in the period leading to this and after. 

It is clear that currencies are paired for example GBPUSD is the British pound against the dollar. So when the central bank governors speak traders pay close attention. So should stock traders because of the exposures they have to these pairs.

If the dollar was to rise against the Yen as an example, products become cheaper to buy from Japan. The inverse is true. If the dollar was to weaken against the Yen, then the cost of production goes up and this affects their bottom line.

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