What is an Exotic Currency?
Exotic currencies are currencies that are thinly traded in foreign exchange markets and are not widely used in global financial transactions.
Key Takeaways
- Exotic currencies are currencies that are thinly traded in foreign exchange markets and are not widely used in global financial transactions.
- Exotic currencies are illiquid, lack market depth, can be extremely volatile, and trade at low volumes.
- Exotic currencies are usually synonymous with developing or emerging market countries and are often subject to partial or total exchange rate controls that render them nonconvertible.
Understanding Exotic Currencies
An exotic currency is a foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth, can be extremely volatile, and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large to compensate for the lack of liquidity.
Exotics are not considered major currencies because they are not easily traded in the foreign exchange market, much less a standard brokerage account. Additionally, exotic currencies are usually synonymous with developing or emerging market countries and are often subject to partial or total exchange rate controls that render them nonconvertible.
Examples of exotic currencies include theThai baht, the Mexican peso, and theSaudi Arabian riyal. On the other hand, major currencies include the U.S. dollar, the euro, the Canadian dollar, and Swiss franc—all from developed countries with large economies and trading relationships.
Factors that affect exotic currencies differ from major currencies. The plight of a major currency will depend on the health of its economy and the interest rate differential, while exotic currencies will often move on changes in the political landscape. In times of political instability, an exotic currency will depreciate at a rapid rate.
Along with less liquidity, exotic currencies generally have higher volatility due to the fragile nature of the associated country's economy. Because of this, investors who wish to trade them will require higher margins in their brokerage accounts to allow for any significant adverse change in the rate of the currency.
FAQs
An exotic currency is a type of currency that isn't widely traded because of high volatility and limited liquidity. These currencies are usually more susceptible to local economic factors. Here are some examples of exotic currencies: Thai Baht (THB) – The currency of Thailand.
What is an exotic currency? ›
An exotic currency is a foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth, can be extremely volatile, and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large to compensate for the lack of liquidity.
What is the difference between minor and exotic currency? ›
If you pair one major trading currency against another and neither are US dollars, this is a “minor trading pair.” An example of this would be a pair between then Swiss Franc and the Euro. An exotic currency pair is a term used to describe the trading of a developing economy's currency with a major currency.
What does exotics mean in forex? ›
Forex exotic pairs basically consist of one major currency like the USD, EUR or JPY traded against another currency of a lower volume, e.g., TRY (Turkish Lira). They are not so different from the major currencies as they have a base and a quote currency.
How does foreign currency work? ›
The exchange rate gives the relative value of one currency against another currency. An exchange rate GBP/USD of two, for example, indicates that two dollars will buy one pound. The U.S. dollar is the most commonly used reference currency, which means other currencies are usually quoted against the U.S. dollar.
What currency is worth the most per dollar? ›
The highest-valued currency in the world is the Kuwaiti Dinar (KWD). Since it was first introduced in 1960, the Kuwaiti dinar has consistently ranked as the world's most valuable currency.
What are exotic products? ›
An exotic product is a derivative with complex characteristics that is often used by seasoned individual investors or financial market specialists.
How many dollars is 1 lot in forex? ›
A standard lot in forex is equal to 100,000 currency units. One standard lot of the base currency would be 107,300 units or $107,300 if you buy EUR/USD when the exchange rate is $1.073, the value of one euro.
How do you calculate exotics? ›
For single race exotics (quinella, exact, trifecta, first 4) this is worked out by multiplying the number of runners selected for each position; for multi-leg exotics (doubles, trebles, quadrellas, big 6's) simply multiply the runners selected in each leg.
How are exotic options priced? ›
The final payoff of range exotic options is determined as the spread between maximum and minimum prices of the underlying asset during the lifetime of the options.
Kuwaiti Dinar
The Kuwaiti Dinar is renowned as the strongest currency in the world. Introduced in 1961, it has maintained a commanding presence due to Kuwait's substantial oil reserves, which account for a significant portion of its economic output.
Is forex a good investment? ›
Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, what is often promoted as an easy road to riches, can quickly become a rocky highway to enormous losses and potential penury.
How do you cash out foreign currency? ›
How to Exchange Currency
- Contact a bank or credit union to make sure it has the currency or will accept foreign currency, and check what the fees are.
- Find exchange rates through your bank, credit union or websites such as xe.com.
- Check the bank's exchange rate to make sure it's fair.
- Arrange for pickup or delivery.
Exotic options can be used in trading commodities such as lumber, corn, oil, and natural gas as well as equities, bonds, and foreign exchange. Speculative investors can even bet on the weather or price direction of an asset using a binary option.
What is an illegal currency? ›
Counterfeit money is currency produced outside of the legal sanction of a state or government, usually in a deliberate attempt to imitate that currency and so as to deceive its recipient.
