What is Parity 2021? Types & How Are They Calculated? – Introduction to Forex
Parity; It is a concept that allows two different currencies to be expressed in terms of a third currency. What is a pair? It literally means equality. There are also investors who express parity as a currency pair. There are many factors affecting the parity, expressed as the ratio of the currencies of the countries to each other. The most important of these factors are; the interest rates of the currencies of the countries and the domestic economic conditions. The first currency written in the parity is expressed as the base currency. The second currency written in the parity means the counter currency. Therefore, in the parity calculation, the value of the base currency is calculated as the counter currency. Parities are divided into categories according to transaction volumes.
What is Parity? What are the Types?
Parity types include:
- Major parity,
- Minor parity,
- Exotic parity,
Parities are classified according to their transaction volume. The most traded parities are called the major parities, while the exotic parities are the least traded. When an evaluation is made on the transaction volumes in the Forex market; While 20% of the transactions are made in exotic parities, the remaining 80% consists of minor and major parities.
What is Major Parity?
Major parity; It is the name given to the parity of two major currencies. As for which currencies are major; It determines the economies of the countries to which currencies belong. The currencies of countries with a large economy are considered as major currencies. The major currencies that can be traded in financial markets are as follows:
- US dollar (USD)
- Euro (EUR)
- British pound (GBP)
- Australian dollar (AUD)
- Canadian dollar (CAD)
- Swiss franc (CHF)
- Japanese yen (JPY)
What Are Major Parity ?
Major parity reasons for preference Looking at; They are preferred by investors because they are parities with high transaction volume, balanced volatility, and low difference between purchase and sale prices. Both currencies are effective in major parity prices and one currency is more effective than the other. If it is necessary to give an example; Both currencies are effective for the investor who will trade with the EUR / USD parity. This parity is the major parity. However, the dollar is more effective than the euro. For this reason, as a result of the events that will take place in the US economy, the change in this parity is more. Major parities with high trading volume are as follows:
- EUR / USD (Euro / US Dollar)
- USD / JPY (US Dollar / Japanese Yen)
- USD / CHF (U.S. Dollar / Swiss Franc)
- GBP / USD (British Pound / US Dollar)
- AUD / USD (Australian Dollar / US Dollar)
- USD / CAD (US Dollar / Canadian Dollar)
What is Minor Parity?
Minor parity; It is the parity between the major currency and the minor currency. The trading volume of minor parities is lower compared to the major parity. In addition, the majority of investors investing in minor parities are local investors. If it is necessary to give an example; In Turkey, the USD / TRY pair is a pair that followed made many investors and transactions. USD is the major currency and TRY is the minor currency. investors in Turkey are being more preferred parity by weight given to local investors to trade this pair.
The major currency determines the price direction in minor pairs. However, in order to make a successful transaction with minor parities, it is necessary to monitor the economic conditions of the countries to which both currencies belong. Minor currencies with a high trading volume are as follows:
- New Zealand dollar (NZD)
- South African Rand (ZAR)
- Singapore dollar (SGD)
What is Exotic Parity?
Exotic parity; They are the pairs followed by local investors. Compared to other parities in terms of transaction volume, the transaction volume of exotic parities is lower than others. Currencies other than minor and major currencies make up exotic currencies. The reason exotic pairs are called exotic; it is not because of the size of the countries or their economies. Due to the high risk of low liquidity, exotic parity They are named as. Volatility and volatility are higher in exotic pairs. Therefore, it is a suitable parity for investors who prefer to trade with a high risk rate. In addition, the interest rates of exotic pairs are higher. As the transaction volume increases, the difference between buying and selling decreases. Exotic currencies are listed below:
- Mexican peso
- South African Rand
- Turkish lira
- Russian ruble
- Indian rupee
- North Grove Won
How to Make Transactions with Parities?
Trading with parities can be done physically as well as Forex market It can also be done over. Making transactions on the Forex market provides an advantage to the investor in terms of speed and cost. The vast majority of Forex investors in the world trade on parities.
Exchange rate transactions are done in pairs in the Forex market. For the exchange rate to be purchased, a long or short position can be opened and a transaction in the preferred parity can be performed. Major, minor and exotic parities can be processed without the need to go to the exchange office. If it is necessary to give an example of the equivalent of the transaction made by going to the exchange office in the Forex market; The investor who goes to the exchange office and buys dollars for TL and the investor who opens a long position in the USD / TRY parity in the Forex market is considered to have done the same transaction.
How is the Parity Calculation Performed?
Parity calculation The two currencies are divided directly into each other. If it is necessary to give an example; For the EUR / USD parity, the euro must be divided into dollars to find the parity balance.
What is the Importance of EUR / USD for the World?
Considering the importance of the EUR / USD parity; It is the parity with the highest transaction volume in the world. When looking at foreign exchange transactions, a considerable amount is carried out on this parity. It is also important where the currency is written in order to obtain information about the investment to be made. The base currency is at the top and the counter currency is at the bottom.
Looking at the currency that changes the balances in the EUR / USD parity; The US dollar causes a change in balance. When the US economic and political balances changed, in many countries, including Turkey shows corresponding changes in the country’s currency is the US dollar. However, the change in the euro is not as much as the US dollar. Since the European Union is the common currency, very few of the events that occur can cause fluctuations in this currency. However, a big event such as the UK’s desire to leave the European Union is a situation that affects the value of the euro. The fact that the euro does not vary much causes the exchange rate to be low. That is why the US dollar is the balance changer in this pair.
Which is the Most Important Quotes for Turkey?
most importance given parity in Turkey; EUR / USD paritydir. When this parity is evaluated in terms of trade balance; euro exports and imports in Turkey are denominated in US dollars. Therefore, the balance in the EUR / USD parity is of great importance for Turkish investors. The EUR / USD parity calculation is done as follows:
- 1 US dollar corresponds to 7.82 TL.
- 1 euro is 9.34 TL.
- EUR / USD parity if; It becomes 9.34 / 7.82. The result obtained here is 1.194.