Currency Market 101

by Nirav Singhaniya Financial Advisor

Currency markets have a reputation of being one of the most deep and liquid financial markets of the world. In fact, the highest trading, in terms of value and volume, occurs in the currency market. At present it has gained immense popularity in India as well. From small traders to established financial institutions, all trade currency derivatives on different exchange platforms like the Bombay Stock Exchange (BSE), the Metropolitan Stock Exchange (MSE) and the National Stock Exchange (NSE).

How to read currency quotes?

A currency consists of three letters, which are the currency ISO code provided by International Organization for Standardization (IOS). For Indian currency, the ISO code is INR. Currencies are traded in pairs, thus you'll find six-letter symbols, representing the two three-letter ISO code. The first three-letters indicate the base pair, while the next three-letters are a representation of the quote currency. Currency pairs basically indicate how much value of a quote currency would translate to the 1 unit value of base currency.

For example the quote currency of EUR vs. INR is stated as: EUR/INR = 77.95, where EUR is Euro, the base currency and INR is Indian Rupee, the quote currency.

What are major, minor and exotic currency pairs?

The various currencies that are traded around the world are categorized into three types with respect to their liquidity and daily trading activity. These are: majors, minors and exotic currency pairs.

Majors are the most widely traded pair that contain U.S. dollar. Currently there are seven major currency pairs:

  • Euro/US Dollar (EUR/USD)
  • US Dollar/Japanese Yen (USD/JYP)
  • Sterling Pound/ US Dollar (GBP/USD)
  • US Dollar/Swiss Franc (USD/CHF)
  • US Dollar/ Canadian Dollar (USD/CAD)
  • Australian Dollar/ US Dollar (AUD/USD)
  • New Zealand Dollar/US Dollar (NZD/USD)

Minors are the pairs that do not have U.S. dollar either as the base or quote currency, and thus these are also known as cross currency pairs. They are often crossed with Euro, Japanese Yen, Australian Dollar and Sterling Pound. A few examples of minor currency pairs are:

  • Euro/Swiss Franc (EUR/JYP)
  • Canadian Dollar/ Japanese Yen (CAD/JYP)
  • Sterling Pound/ New Zealand Dollar (GBP/NZD)
  • Australian Dollar/ Canadian Dollar (AUD/CAD)

Exotics consist of currencies from developing nations of the world such as the Middle East, Asia, Africa and the Pacific. Though these pairs are neither minors nor majors still they are a vital part of the currency market today and some of them are:

  • US Dollar/ Thailand Bhat (USD/THB)
  • US Dollar/ Singapore Dollar (USD/SGD)
  • US Dollar/ Turkish Lira (USD/TRY)

What are the advantages of currency derivatives trading in India?

The currency derivatives act as a great instrument for managing risk. The key advantages of trading them are:

  • 24 hours trading: Currency trading occurs around the world as a result of which at any time some or the other market is open. This means forex trading can take place 24 hours a day which is unique only to this market.

  • Speculation: You have the opportunity to speculate market movements with the help of currency features. Let's say you think that oil prices will rise and this would leave an impact on the import bill of India then a good move would be to buy USD/INR, assuming depreciation of INR for a medium to short-term.

  • Hedging: If you’re a businessman, then you like other businessmen can take advantage of currency market for securing your forex exposure. You can hedge losses with relevant positions. To put it simply, if you’re an importer and you need to make future payments in USD, you can easily hedge and fix a particular payout rate. You can do this by buying USD/INR at current rate if you think that the value of INR would depreciate in future.

To trade currency derivatives you will need a trading account. For this make sure that you go for a trustworthy broker like IndiaNivesh ltd. that offers efficient solutions like advice from experts about the currency market live, technical analysis, fundamental analysis and sentimental analysis, allowing you to maximize your profits on every trade. 

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About Nirav Singhaniya Freshman   Financial Advisor

5 connections, 0 recommendations, 20 honor points.
Joined APSense since, May 8th, 2019, From Mumbai, India.

Created on May 10th 2019 03:53. Viewed 312 times.


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