Glossary
Navigate the complex world of currency management with our comprehensive dictionary of financial terms and definitions.
Exotic Currency
Exotic currencies are currencies that are thinly traded and highly illiquid. Most exotic currencies are Emerging Market countries’ currencies. They include, among many others, the Armenian Dram (AMD), the Belorusian Ruble (BYR), the Egyptian Pound (EGP), the Indonesian Rupiah (IDR), the Moroccan Dirham (MAD), the Qatari Rial (QAR), the Uzbekistani Som (IZS), etc.. When hedging their FX exposure, risk managers are naturally reluctant to sell exotic currencies that trade at a forward discount because of their high interest rates. But this is counter-productive. Currencies with a high cost of carry tend to be highly volatilite, and refusing to hedge can lead to severe losses. The solution is to calculate a weighted-average rate of all individual pieces of exposure and to build a ‘tolerance’ (in % terms) around that benchmark rate. Then, ‘take-profit’ and ‘stop-loss’ orders are set that allow the firm to effectively delay the execution of the trades, and thus to take shorter-maturity hedges that create savings on the carry.