Forex

Exotic Currency Definition

Exotic Currency is a thinly traded currency.  These currency pairs are traded by pure speculators.  Unlike the major currencies, Euro, US Dollar, etc. the markets for exotic currencies are not large enough for active trading.  Exotic currencies also have huge bid/ask spreads which makes it difficult for traders as well.  Speculators will buy an enormous amount of exotic currencies, in hopes that the currency at some point in the future will be of some value.  Examples of an exotic currency would be the Iraqi Dinari or the Uruguay peso.  Currently a trader can purchase 1 Million Dollars of Iraqi Dinari for roughly $500 US dollars.  Who knows, maybe 100 hundred years from now it will make a lot of people rich.

The Euro Libor is the Libor rate denominated in Euro.  The current Euro Libor rate is quoted based on the average of rates across sixteen European banks.  The Euro Libor represents the short-term lending rate that banks extend to each other on a daily basis.  This rate is set by a small group of wealthy London banks on a daily basis.  The main reason for the Euro Libor rate is for the continuity in swap contracts dating back to pre-Euro times.  Due to the large size of the participating banks, the Euro Libor rate is regarded as the benchmark for short-term interest rates.

A xenocurrency is a currency which trades outside of its home country.  The name sounds a bit strange, but that is because the root word "Xeno" means foreign or strange, hence the name name xenocurrency.  When a xenocurrency is deposited in another country, it is called and quoted in eurocurrency as the Euro is the most valuable currency in the world.  It was once feared that inflation would be on the rise because there were too many central banks holding part of their reserves in xenocurrencies.  Banks got involved in the practice in the first place because reserve requirements and interest rate restrictions were not subjected to domestic banking regulations.

An authorized forex dealer is any financial institution that has received approval from a regulatory body to act as a dealer for the act of buying and selling currencies.  In the United States the National Futures Association (NFA) is responsible for registering and auditing entities involved in the Forex business.

The NFA was formed in 1982 and since that date has been responsible for all regulatory and auditing activities of companies involved futures business with the general public.  There is a mandatory membership in the National Futures Association and it is illegal fo an authorized forex dealer to do business with non-NFA Members.

The annual dues for participating in the forex market is quite expensive.  Below is the list of annual fees associated with becoming an authorized dealer.

Authorized Forex Dealer Annual Dues Schedule

The currency carry trade is created by simply borrowing funds at a low rate and investing these funds into higher yielding assets.  A very relevant example can be seen in the famous "yen carry" trade in which Japanese Yen are borrowed at an interest rate which is next to nothing and invested into higher yielding US treasury bonds.  The interest rate differential between the two is a bit over 300 basis points.  As you can see, investors using leverage stand to make quite a bit of money.

When you hear the term Big Figure in the forex world; the person is referring to the non-pip portion of the price quote.  For example, the EUR/USD is currently trading at 1.5842 and the big figure would be 1.58.  The fourth and fifth digits measure the number of pips, or points which is what most traders refer to when determing their profit. 

Currency pairs are commonly quoted with 4, and even 5, places after the decimal point depending on the broker you are using.  However, the Japanese Yen is the exception to this rule as it trades at such a high multiple against the USD.  Currently the foreign exchange rate for the USDJPY is 107.02 and therefore in this case, the Big Figure is 107 while the the pips or points are .02.

The term Big Figure is also referred to as a "handle". 

Forex arbitrage is a trading strategy where a speculator attempts to make a profit by exploiting the inefficiency in currency pairs.  This inefficiency is always self correcting, so the window of opportunity for profiting from the spread is very limited.

How to Calculate the Arbitrage

In order to calculate the arbitrage traders use forex arbitrage calculators.  There are a number of free forex calculators available for download on the internet.  Prior to initiating trades, speculators should use free demo accounts to see if trading the arbitrage can be a profitable venture.  A trader would need accounts with forex brokers in multiple locations around the world.  Most arbitrage techniques require trading in two to three currency pairs. 

Below is an excerpt from http://www.nobletrading.com.

The base currency is the first currency quoted in a currency pair.  The base currency is referred to as the parent currency and exchange rates are quoted in per unit of the base currency.  The base currency is the more valuable currency.  Therefore in the EUR/USD currency pair, the Euro is more valuable than the Dollar, so it is the base currency.  The base currency is also known as the accounting currency or domestic currency.  So even though large banks may trade a number of currency pairs, if their base currency is Euros, all profits and losses will be converted to Euros. Currently the Euro is the dominant base currency on the forex market.

The forex trading hours are 5 days a week, 24 hours a day.  The forex market is able to trade 24 hours a day since there is no physical location of the exchange.  The forex market is rather a network of computers and large banking institutions that provide the marketplace for the forex market.  Trading for the week begins at Sunday 5pm EST and runs through Friday 4pm EST.

4 Major Forex Trading Blocks

There are four primary trading blocks for the forex:

1. New York: 8:00 am to 4:00 pm EST
2. Tokyo 8:00 pm to 4:00 am EST
3. Sydney 5:00 pm to 2:00 am EST
4. London 2:00 am to 12:00 pm EST

Most Active Forex Trading Block

The largest amount of trading activity occurs when there is overlap between the various forex trading hours. The most active period of the day is from 8:00 am EST and 12:00 pm EST as it is the overlap between the American and London markets.

A forex mini account is a trading account approved to buy and sell a currency pair in trading lots of one tenth the normal size.  The standard forex contract sizes are 100,000 units.  A forex mini account allows a trader to trade in 10,000 units.  Each pip is valued at $10 U.S., so with a forex mini account you can trade as small as $1.