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.
|Major Pairs||Minor Pairs|
|U.S. dollar (USD) /||Euro (EUR)||U.S. dollar (USD) /||Norwegian Krona (NOK)|
|Japanese Yen (JPY)||Swedish Krona (SEK)|
|Canadian Dollar (CAD)||New Zealand Dollar (NZD)|
|Australian Dollar (AUD)||Mexican Peso (MXN)|
|British Pound (GBP)||Thai Baht (THB)|
|Swiss Franc (CHF)|
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’.
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.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.