Pairs & Major Currency Products

Study Notes:

Foreign exchange dealings involving the U.S. dollar, euro currency, Japanese yen, Canadian and Australian dollars, British pounds and the Swiss franc are referred to as currency majors, while you may consider minor pairs as the U.S. dollar versus any of the Norwegian or Swedish krona, New Zealand dollar, Mexican peso or Thai baht.

In the foreign currency market, the U.S. dollar is typically the major unit – for example:

• USD / JPY
• USD / CHF, or
• USD / MXN

But not always –

Note that both the euro and British pound are also quoted as the major in pairs such as:

• GBP / USD, and
• EUR / USD

And while the U.S. dollar is usually on one side of a currency transaction, that’s not always the case. When you involve two non-US dollar currencies as a pair, this is generally referred to as a ‘cross rate’.

Currency Products

Now, in terms of currency products, there are three major types:

• Cash currency
• Futures, and
• Futures options.

Cash currency trading takes place between financial institutions electronically or by phone on the interbank currency market.

Such a central marketplace is by far the most popular market and is extremely liquid.

Similarly, other Electronic Communication Networks, or ECN-like models, where buyers and sellers come together to trade, have risen to dominance.

The structure of such ECNs is usually based on one of two models: The first offers an artificial bid/ask spread, while the second provides a montage of contributing quotes with a fixed rate commission.

Alongside cash currency trading is currency futures – another popular market.

The futures exchange operates for future delivery, offering standardized margined products and rules, while the cost of carry is embedded in deferred contract prices.

The CME and GLOBEX each provide near 24-hour access to contracts with physical delivery, unless settled prior to expiration.

Whichever type of product you choose is simply a matter of preference, however you’ll need to consider margin requirements for futures and options, as well as the cost of carry for cash foreign exchange.