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Using Currencies to Play M&A

Private Equity Risk
Source: Getty Images
Private Equity Risk

Want to use currencies to trade on pending deals? Here's a step by step guide.

To use currencies to take positions on cross-border mergers and acquisitions, Rebecca Patterson, global head of currencies and commodities for J.P. Morgan's private bank, recommends starting with the newspaper. Search for announcements of cross-border deals with sizable cash components, she says.

"Right now the good chance is that there will be" a cash component, since companies in the U.S. and elsewhere have plenty of cash, Patterson said. Then, once you've identified a deal, buy the currency of the target company - just the way the acquirer will.

"If I'm a U.S. company and I'm buying a British company, that U.S. company has to buy sterling to buy the company," Patterson told CNBC's Melissa Lee.

It's a good idea to look for big deals, since those currency buys are more likely to move the market, Patterson said. But a series of smaller deals could have the same effect - like the roughly $20 billion in M&A deals in Canada that have to close by the end of the summer.

Unlike trading stocks in anticipation of deals, Patterson recommends waiting to buy currencies once a deal is really going through.

"Normally what happens is the companies that are buying someone else aren't gonna buy a foreign currency before they know that deal's going to happen," she said. "That's why you don't buy until you've got the news."

Andrew Busch, global currency and public policy strategist for BMO Capital Markets, pointed out that Canada has deals worth about $20 billion that should close by the end of the summer. Patterson agreed that the Canadian dollar is a currency she'll be watching for that reason - and she expects the losers in those deals to be the British pound and the Swiss franc.

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm.

"Money in Motion Currency Trading" repeats on Saturdays at 7pm.

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