DEFINITION of 'Demonetization'
Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.BREAKING DOWN 'Demonetization'
A recent example of demonetization occurred when the nations of the European Monetary Union adopted the euro. In order to switch to the euro, authorities first fixed exchange rates for the varied national currencies into euros. When the euro was introduced, the old national currencies were demonetized. However, the old currencies remained convertible into euros for a while so that a smooth transition through demonetization would be assured.National Currency
The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is usually the predominant currency used for most financial transactions in that country.BREAKING DOWN 'National Currency'
A handful of national currencies such as the U.S. dollar and the euro have achieved global status as reserve currencies and are extensively used in international trade transactions. The euro has supplanted the national currencies of a number of nations that comprise the European Union. The national currencies of some countries such as the United Arab Emirates are pegged or fixed to the U.S. dollar.Want to Make Money Even When the Market is Falling?
If the markets are in a free fall you want to be able to profit when everyone else is losing their shirt. You need to learn everything you need to know about short selling by signing up for our free 8-week email course. Learn what a short sell is, what the risks are and how you can use them to profit on declining stocks. So sign up today and start looking at every movement as an opportunity to make money.Currency
Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.
BREAKING DOWN 'Currency'
Generally speaking, each country has its own currency. For example, Switzerland's official currency is the Swiss franc, and Japan's official currency is the yen. An exception would be the euro, which is used as the currency for several European countries. While these currencies can be specific to a nation, other countries have declared foreign currency to be legal tender in their own country. For example, El Salvador and Panama allow the use of the U.S. dollar as legal tender, and immediately after the founding of the U.S. mint in 1792, U.S. residents used Spanish coins because they were heavier.Counter Currency
The currency used as the reference or second currency in a currency pair. When viewing an ISO currency code the counter currency is listed after the base currency, and is separated with a slash. Major currencies, such as the euro and U.S. dollar, are more likely to be the base currency in a currency pair.BREAKING DOWN 'Counter Currency'
It is important to understand the structure of the currency pair in order to understand forex trading. In the currency pair USD/EUR the euro (EUR) is considered the counter currency. In the pair, units of counter currency are per unit of base currency.
Currency Pair
A currency pair is the quotation and pricing structure of the currencies traded in the forex market; the value of a currency is a rate and is determined by its comparison to another currency. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.
BREAKING DOWN 'Currency Pair'
All forex trades involve the simultaneous purchase of one currency and sale of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and implicitly sell the quoted currency. The bid (buy price) represents how much of the quote currency you need to get one unit of the base currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency.For example, if the USD/EUR currency pair is quoted as being USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you purchase (receive) $1 in U.S. currency. If you sold the currency pair, you would receive 1.5 euros for every $1 you sell. The inverse of the currency quote is EUR/USD, and the corresponding price would be EUR/USD = 0.667, meaning that 66.7 cents in U.S. currency would buy 1 euro.
Major Currency Pairs
There are as many currency pairs as there are currencies in the world. The total number of currency pairs that exist changes as currencies come and go. All currency pairs are categorized according to the amount of volume that is traded on a daily basis for a pair. The currencies that trade the most volume against the U.S. dollar are referred to as the major currencies. These include the EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD. All of the major currency pairs have very liquid markets that trade 24 hours a day every business day, and they have very narrow spreads.
Minors and Exotics
Currency pairs that are not associated with the U.S. dollar are referred to as minor currencies or crosses. These pairs have slightly wider spreads and are not as liquid as the majors, but they are sufficiently liquid markets nonetheless. The crosses that trade the most volume are among the currency pairs in which the individual currencies are also majors. Some examples of crosses include the EUR/GBP, GBP/JPY and EUR/CHF.Exotic currencies pairs include currencies of emerging markets. These pairs are not as liquid, and the spreads are much wider. An example of an exotic currency pair is the USD/SGD (U.S. dollar/Singapore dollar).
Base Currency
In the forex market, currency units are quoted as currency pairs. The base currency – also called the transaction currency - is the first currency appearing in a currency pair quotation, followed by the second part of the quotation, called the quote currency or the counter currency. For accounting purposes, a firm may use the base currency as the domestic currency or accounting currency to represent all profits and losses.BREAKING DOWN 'Base Currency'
In forex, the base currency represents how much of the quote currency is needed for you to get one unit of the base currency. For example, if you were looking at the CAD/USD currency pair, the Canadian dollar would be the base currency and the U.S. dollar would be the quote currency.The abbreviations used for currencies are prescribed by the International Organization for Standardization (ISO). These codes are provided in standard ISO 4217. Currency pairs use these codes made of three letters to represent a particular currency. Currencies constituting a currency pair are sometimes separated with a slash character. The slash may be omitted or replaced by a period, a dash or nothing.
The major currency codes include USD for the U.S. dollar, EUR for the euro, JPY for the Japanese yen, GBP for the British pound, AUD for the Australian dollar, CAD for the Canadian dollar and CHF for the Swiss franc.
Parts of a Currency Pair
In forex, currency pairs are written as XXX/YYY or simply XXXYYY. Here, XXX is the base currency and YYY is the quote currency. Samples of these formats are GBP/AUD, EUR/USD, USD/JPY, GBPJPY, EURNZD, and EURCHF.When provided with an exchange rate, currency pairs indicate how much of the quote currency is needed to buy one unit of the provided base currency. For example, reading EUR/USD = 1.55 means that _1 is equal to $1.55. This directly says that in order to purchase _1, a buyer must pay $1.55. The currency pair quotation is read in the same manner when selling the base currency. If a seller wants to sell _1, he will get $1.55 for it.
Simultaneous Movement
Forex quotations are stated as pairs because investors simultaneously buy and sell currencies. For example, when a buyer purchases EUR/USD, it basically means that he is buying euro and selling U.S. dollars at the same time. Investors buy the pair if they think that the base currency will gain value in contrast with the quote currency. On the other hand, they sell the pair if they think that the base currency will lose value in contrast with the quote currency.Conversion Rate
The ratio at which one currency can be exchanged for another. For example, a conversion rate for euros to dollars of 1.25 means that one euro can convert to 1.25 dollars. A high conversion rate between currencies means that one currency can "buy" more units of the other. If one euro can be converted into more than one U.S. dollar then the dollar has a lower value relative to the euro.Also commonly referred to as the exchange rate.
BREAKING DOWN 'Conversion Rate'
The conversion rate depends on several factors, one of which is the interest rate set by the currency's issuing central bank compared to the interest rate set by the bank of the currency being converted into. Countries with high real interest rates typically attract investors from other countries and thus have an increased demand and higher value for their currency.Permitted Currency
A currency that is free from legal and regulatory restrictions to be converted into another currency. A permitted currency is often a minor currency and has a fairly active market for exchanges with major currencies.BREAKING DOWN 'Permitted Currency'
Transactions between a major currency, such as the U.S. dollar, and a permitted currency are smoother than ones between a major currency and a tightly-controlled one because the permitted currency is more liquid. In addition, some transactions require the settlement to be made in a major currency.Quote Currency
A quote currency is the second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.Also known as the "secondary currency" or "counter currency".
BREAKING DOWN 'Quote Currency'
Understanding the quotation and pricing structure of currencies is essential for anyone wanting to trade currencies in the forex market. If you were looking at the CAD/USD currency pair, the U.S. dollar would be the quote currency, and the Canadian dollar would be the base currency.Major currencies that are usually shown as the quote currency include the U.S. dollar, the British pound, the euro, the Japanese yen, the Swiss franc and the Canadian dollar.
International Currency Exchange Rate
The rate at which two currencies in the market can be exchanged. International currency exchange rates display how much of one unit of a currency can be exchanged for another currency. Currency exchange rates can be floating, in which case they change continually based on a multitude of factors. Alternatively, the exchange rates of some foreign currencies are pegged, or fixed, to other currencies, in which case they move in tandem with the currencies to which they are pegged.BREAKING DOWN 'International Currency Exchange Rate'
International currency exchange rates are important in today's global economy. Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments priced in foreign dollars.
For example, for a U.S. investor, knowing the dollar to euro exchange rate is valuable when choosing European investments. A declining U.S. dollar could increase the value of foreign investments, just as an increasing U.S. dollar value could hurt the value of foreign investments.
