Essay: Selection of Currency Pairs

Sample Essay

The selection of currency pairs must factor in the market conditions. For this reason, traders must buy currencies that have high interest rates and sell that have low interest rate.

The economy will affect the stability of the currency pair, hence the pair selected must offer the trader maximum returns in the given market. In consideration of the current financial market, the commonly used currency pairs are the US dollar, Australian dollar, Canadian dollar and the Euro against the Japanese yen[1]. Other currency pairs include the British pound against the Japanese Yen. Taking this into consideration, the risks the trader incurs include a return from interest difference must be higher than the exchange rate[2]. The second risk involves the realisation of losses from unfavourable markets that create margin calls or a complete end of the trade, when substantial leverage is used. The third risk to the trader is the varying on their returns from the compounding of interests due to the market’s varying interest rate differences[3].

[1] Burnside et al., Returns to Currency, 5.

[2] Burnside et al., Returns to Currency, 5.

[3] Ibid,

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