Exotic Currency Trading: Risks and Advantages

Exotic Currency Trading: Risks and Advantages
Forex market currencies generally classifies into three groups: major, minor and exotic currency. Currency Exotic is the term given to the currency in thin trading is not liquidated, less popular in market activity is consistent, and trade with a high markup costs in certain markets or dealer.
List of exotic currency pairs:
Due to the constantly changing trading patterns based on economic and geopolitical developments, exotic forex list can change from time to time. The following is an indicative list of exotic currencies forex:
AED UAE Dirham Argentinean Peso ARS BRL Brazilian RealCLP Chilean Peso Chinese Yuan Renminbi CNY CZK Czech KorunaEGP Egyptian Pound HKD Hong Kong Dollar HUF Hungarian ForintIndonesian Rupiah IDR ILS INR Indian Rupee Israeli ShekelIRR Iranian Rial Icelandic krona ISK JOD Jordanian DinarKRW South Korean Won Kuwaiti Dinar KWD MXN Mexican PesoMalay Ringgit MYR PHP Philippine Peso PKR Pakistani RupeePLN Polish zloty RUB Russian Ruble SAR Saudi Arabian RiyalSingaporean dollar SGD THB Thai Baht TRY New Turkish LiraTWD Taiwanese Dollars ZAR South African Rand Zimbabwe Dollar ZWD

All of these currencies shows the characteristics of thin trading, wider bid-ask spreads and limited trading interest by market participants.
Exotic currencies does not necessarily mean a weak currency or undervalued, but it shows the limitations and "all is not populeran" behavior in terms of trading activity. For example, Kuwaiti dinar (KWD) and Saudi riyal (AED) are two high-value currency, but they are still considered exotic because trade is limited.
Risks associated with Forex Trading Exotic Currencies: Due to low liquidity factors and limitations, the following risks associated with forex trading exotic currencies:
Apart from speculation, the price of forex is fundamentally determined by supply and demand trends follow "Purchasing Power Parity" and interest rate differentials. It would be very difficult to track and predict the development of the macro-economic factors such as for distant countries. Lack of awareness and challenges in tracking the deciding factor causing a higher risk.
Low liquidity makes forex trading more difficult exotic. Most transactions take place on the banks with a fixed interest rate predetermined for remittance or similar activities.
Analysis of historical daily data for all the exotic currency pairs will show profitable opportunities both in terms of price variations seen during a short period, medium and long term. However, the high cost of mark-ups charged by forex dealers can erode potential profits.
In some cases where there is political uncertainty in the country of origin of the currency, this leads to high fluctuation, making it difficult even for experienced traders to trade in the forex exotic. As an example of the wide spread has been observed in Russian rubles (RUB) 33.5 to 39 per USD in the short period from July 2014 until September 2014, because of a conflict of Ukraine. Another similar example is the Iraqi dinar investment schemes are very popular, where some investors have been waiting for years so that they can get the investment.
Advantages associated with foreign exchange trading for exotic currencies:
In addition to the risks already mentioned above, exotic currencies showed high volatility properties to the value of the high prices that move in the short term and long term, allowing the potential for huge profits.
Imagine if you are on the correct side of the above Russian ruble / US dollar exchange rate - in less than 2.5 months, you can get a gain of about 16.5% (possibly more with the use of leverage).In the long-term period between 2008 to mid-2013, US dollar (USD) against the Indian rupee (INR) exchange rate increased from about 39 to 69, a gain of 77%.Aside from directly buying the desired currency, there are few other investment options are to benefit from exotic currencies. Some look more complex deals such as currency futures, currency options and even a variant on the currency barrier option is available as an OTC product in selected markets. Each individual should be given the complex nature of these products, which further adds to the complexity of trading exotic currencies.
Profile forex traders to trade the exotic currencies:
Given the above factors, exotic currencies is not recommended for beginners, short-term traders, or traders with limited trading capital.
Market maker and experienced dealers who benefit from trading exotic currencies by utilizing high spreads, and the expense of other colleagues.
Exotic forex can be a good investment for long-term investors experienced, international investment managers or investors who are willing to add some diversification of their investments at the global level.
Ideally, an individual who has a consistent action on specific country (and certain currencies), with the potential for long-term investment, can try to monetize exotic currencies with a "set and forget".
Conclusion
Exotic trading is not for everyone. Short-term profit opportunities marred by the high cost of mark-up and the magnitude of the spread, while the long-term investment requires patience, knowledge of economic and geopolitical developments and their impact. An individual should consider exotic forex investing and trading with considerable experience and potential risks.