We can explain it in two ways.
In addition to trading a profit or a return, foreign exchange trading can be used to hedge a stock portfolio. For example, if you set up a portfolio of shares in a country with a potential to raise the value of a share, but a risk of insolvency in currency, such as in the recent US, then a trader may own the share. Create a portfolio and shorten the Swiss franc or euro To sell futures. In this way, the portfolio value will increase and the negative impact of the falling dollar will be significant. This is true for investors outside the United States who take their earnings back to their own currency.
A second approach to transaction currencies is to understand baselines and long-term benefits when a currency advances in a particular direction and provides a positive interest rate differential that provides a value in the currency value of the return of the investment. This type of trade is known as “transport trade”.
For example, a trader can take the Australian Dollar against the Japanese Yen. When the original of this article is published, the Japanese interest rate is 0.05%, the most recently reported Australian interest rate is 4.75%, so a trader can earn 4% in this trade.
Nevertheless, such a positive interest should be seen in the real exchange rate context of the AUD / JPY before the decision of interest is given. If the Australian dollar is strengthening against the yen, it would be appropriate to hold the AUD / JPY to gain both the appreciation of the currency and the yield of interest.
A parity is a pair of currencies in which a country’s currency is valued against the currency of the other country. According to their prevalence in global markets, major and minor (exotic) parities are examined in two groups. The parallels traded most in global markets are called major. Another reason for the major denomination of these currencies is that country economies are robust and dynamic.
There are 7 major currencies that are traded on financial markets. These are Euro, US Dollar, Japanese Yen, British Sterling, Swiss Franc, Canadian Dollar, Australian Dollar. Minor currencies are currencies with lower transaction volumes, preferred by local investors.
The most preferred minor currencies are New Zealand Dollar, South African Randi, Singapore Dollar. Parity pairs consisting of one major currency and one minor currency are also called minor parity.
On the Forex market, every transaction on the parity occurs when a foreign currency is sold and other foreign currency is bought. According to this price, it is necessary to understand how much the counter currency should be paid to get one from the first currency. If the EURUSD is priced at 1.1090, EUR1.1090 will have to be paid to get 1 EURO. In the Forex market, investors aim to earn from price fluctuations of currency pairs by buying or selling other currencies in exchange for a foreign currency. The expectation of investors who want to buy the euro and make a profit increases the value of parity, but this situation is shaped by the multiplicity of supply and demand.
How is the parity calculated? We will clarify this question with the help of a sample;
EURUSD is calculated as: 3,2440 / 2,9220 = 1,1101.
There are many factors that affect the price of the parity. These are economic data, decisions of the Central Bank, political developments and geopolitical risks, which have a significant effect on the price of the currency. The increase in interest rates ensures that the growth figures announced on the anticipation or the value of the industrial currency are appreciated; Low employment, rising foreign trade deficits in emerging countries, or rising inflation lead to the devaluation of the money. The uncertainties in the political structure of the country and the loss of political confidence will cause the currency to lose value.