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Distinguishing Currency Holdings from Foreign Exchange Contracts

Article Quant Q&A · Author: Patty
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Summary

The document examines whether an exchange-rate series such as AUD/USD should itself be called a financial asset. It separates the currency from a quoted rate and from a transaction or contract involving two currencies. One answer recommends describing the object under study as an AUD/USD foreign exchange contract, since a trader enters a transaction to exchange one currency for another rather than purchasing an abstract pair.

Other responses emphasize that an exchange rate expresses the market value of one currency in units of another, while a more technical view distinguishes currency units from bank accounts and contractual claims. Under that view, a contract specifying a future exchange is the asset, rather than the currencies delivered at settlement. These answers expose differences in terminology and assumptions about what counts as an asset; they do not settle the definition for every legal or economic context. For academic writing, the practical lesson is to name precisely whether the data represent a spot rate, a currency holding, or an FX contract.

Key ideas

  • An FX pair quote describes the relative price of two currencies rather than a standalone item one buys.
  • A currency holding, an exchange rate, a bank account, and an FX contract can refer to distinct things.
  • An FX contract represents an agreement to exchange specified currency amounts.
  • The asset terminology depends on the intended economic or contractual object.
  • Thesis wording should identify whether the observations are rates, holdings, or contracts.

Tags

ForexDerivatives pricing
Full text
# Does it make sense to refer to a forex pair as a 'financial asset'


# Does it make sense to refer to a forex pair as a 'financial asset'












I am working with the AUD/USD forex pair for my master's thesis (not in finance, hence I'm asking such a simple question). I am wondering if it's proper usage of the word 'financial asset' to refer to the AUD/USD forex pair.

For example:

> The financial asset used in this thesis is the AUD/USD foreign exchange price, between the years of 1990 and 2000.

Wikipedia's 'financial asset' page lists currency as one of the things it can mean, however I'm unsure if that applies to forex prices like in this context.

## Answer by jd8 (score 4, accepted)

https://quant.stackexchange.com/a/35110

You have 2 contracts AUD/USD and USD/AUD, one is to buy AUD with USD, the other is buying USD with AUD.

The currency itself is an asset, however the use of the word pair could be misleading since you do not buy the pair. So, the word financial asset could be used in reference to buying AUD with USD in the same way as buying APPL with USD.

Maybe this sounds better...

> The financial asset used in this thesis is the AUD/USD foreign exchange contract

## Answer by Kiwiakos (score 1)

https://quant.stackexchange.com/a/35111

Financial asset is the Aussie dollar bill or coin. If your numeraire happens to be the US dollar, then the FX rate is the market value of the financial asset denominated in units of the numeraire.

## Answer by Yannis (score 1)

https://quant.stackexchange.com/a/37624

A currency can never be an asset! If it were, its value ought to appreciate with the risk free rate of return in a risk-neutral world. It does not, as it is obviously the case for the domestic currency of which the value stays constant.

Many people confuse the currency with the Bank Account, which is indeed an asset. They are not the same though. And clearly a currency coin or note is not a Bank Account and thus not an asset.

A contract that stipulates the receipt of a currency unit in some specific future time is indeed an asset. The quotation AUD/USD = 0.79 refers to a swap type of contract between two parties A and B that stipulates that A will receive from B at some future time (today + settlement period) one unit of AUD and give B 0.79 units of USD. Neither the one unit of AUD not the 0.79 units of USD exchanged at settlement date constitute assets. The contract does!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.