What is exotic currency?
Exotic currency is currency that is not common in the foreign exchange market. Exotic currency is usually from developing countries such as parts of Asia, the Pacific, the Middle East and Africa.
It is not as easy to trade exotic currency because the market does not have the same amount of activity for exotic currency as it does for main currencies. The main currencies include “majors” and “minors”.
Major currencies are the ones most commonly traded. They include the United States dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), and the Swiss franc (CHF). Some groups also include the Australian dollar (AUD) as a major currency, though it is often considered a minor. Minor currencies also include the Canadian dollar (CAD) and the New Zealand dollar (NZD).
Exotic currencies are neither major nor minor, but they are still important in the Forex market.
What makes exotic currency trading different?
Exotic currency trading is different from trading in major currencies because of the level of interest in exotic currencies in the market. The relative lack of activity in the exotic currency market means the currencies can have a high cost and can carry a high risk.
High risk creates opportunities for high profits because the political and financial environments in developing countries may change quickly and cause the country’s currency to rise or fall in value.
Exotic currency rates
Exotic currency rates have bigger spreads than the main currencies. So, it is important to trade exotic currency with care and take into account the higher spread when calculating the potential profit. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.
Exotic currencies’ cross rates
Most currencies are traded against the US dollar in a currency pair. Any quote that is not against the US dollar is called a ‘cross quote’. An example is GBP/JPY (British pounds/Japanese yen).
The quote is made by measuring the British pound against the US dollar, then the Japanese yen against the US dollar.
The result is a cross quote:
GBP/USD = 1.7464
USD/JPY = 112.29
So the cross quote is: GBP/JPY = 1.7464 x 112.29 = 196.10
This means that one British pound is worth 196.10 Japanese yen.
Hundreds of cross rates exist that involve exotic currency pairs, but they often have low liquidity and might be harder to sell.