Major Currencies and Currency Pairs

Major currencies are those issued by the world’s largest economies and are the most liquid in the foreign‑exchange market. The NISM syllabus lists the six most common majors: US Dollar (USD), Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF) and Australian Dollar (AUD). These currencies together account for over 80% of daily global FX turnover.

Liquidity matters because it leads to tighter bid‑ask spreads, lower transaction costs and more reliable price discovery – all points frequently tested in NISM questions. For an Indian distributor, trading in majors means better execution on the NSE’s currency derivatives platform and easier hedging of foreign‑currency exposure.

Exam relevance: The exam often asks you to pick the ‘major’ currency in a pair, to identify which pairs are most liquid, or to compute the impact of a spread on a hedging cost. Remember that the definition is based on trading volume, not on the strength of the economy.

• USD – United States Dollar
• EUR – Eurozone Euro
• GBP – British Pound Sterling
• JPY – Japanese Yen
• CHF – Swiss Franc
• AUD – Australian Dollar

In FX markets a currency pair is expressed as BASE/QUOTE (e.g., EUR/USD). The first currency (base) is the one being bought or sold, while the second (quote) indicates how many units of that currency are needed to purchase one unit of the base.

For example, if EUR/USD = 1.1200, it means 1 Euro costs 1.1200 US Dollars. The price moves inversely for the base currency – a rise in EUR/USD reflects Euro appreciation against the Dollar.

Why this matters for the exam: Questions may present a rate and ask you to compute the amount of quote currency needed for a given base amount, or to interpret a price movement. Misreading the order leads to wrong calculations and loss of marks.

• Base currency – the currency being quoted.
• Quote currency – the currency in which the price is expressed.

Currency pairs are grouped by liquidity and trading frequency. Major pairs involve two major currencies (e.g., EUR/USD, USD/JPY). Minor pairs combine a major with a non‑major (e.g., EUR/GBP, USD/CAD). Exotic pairs pair a major with a currency from a smaller or emerging market (e.g., USD/INR, EUR/TRY).

Liquidity follows this hierarchy: majors > minors > exotics. Higher liquidity translates to narrower spreads and lower slippage, which is crucial for cost‑effective hedging. The NISM exam frequently tests you on identifying which category a given pair belongs to.

Practical implication: An Indian exporter hedging USD exposure will prefer USD/INR futures because they are classified as an exotic pair, but they still enjoy decent liquidity on Indian exchanges due to regulatory focus on USD.

• Major – two major currencies, highest volume.
• Minor – one major, one non‑major, moderate volume.
• Exotic – one major, one emerging‑market currency, lowest volume.

Daily turnover figures illustrate why majors dominate the FX market. High volume ensures that large orders can be executed without moving the market price, a concept called market depth. For Indian participants, this means better price discovery on the NSE’s currency derivatives segment.

Lower‑volume pairs (minors and exotics) exhibit wider spreads and higher execution risk. The NISM exam may present a spread figure and ask you to assess its impact on a hedging strategy; remembering that exotics typically have spreads 2‑3 times wider than majors helps answer quickly.

Regulators such as SEBI monitor liquidity to ensure fair pricing. Brokers are required to provide best‑execution for major pairs, which is why most Indian retail platforms display only majors and a limited set of exotics.

Indian exporters and importers often hedge using the most liquid major pairs to minimise cost. When the exposure is in USD, the USD/INR futures contract is the preferred tool, even though it is an exotic pair on the global stage, because SEBI permits it on Indian exchanges.

For portfolio managers, holding assets denominated in EUR or JPY requires understanding the base‑quote relationship to compute accurate NAVs. Mis‑quoting can lead to valuation errors, a common source of exam questions.

SEBI’s framework mandates that brokers disclose the spread and margin requirements for each currency derivative. Candidates should remember that margin for majors is typically lower (e.g., 5‑7% of contract value) compared to exotics (often 10% or higher).

When quoting, the base currency is always listed first. However, regional conventions differ. In Europe, EUR/USD is quoted as the number of US Dollars per Euro, while in Japan USD/JPY is quoted as the number of Yen per US Dollar. Remembering the direction avoids sign errors in calculations.

One pip (percentage in point) is the smallest price move in a pair. For most pairs it equals 0.0001 of the quote currency, but for JPY pairs it equals 0.01 because the Yen is quoted to two decimal places. The exam may ask you to compute the monetary value of one pip for a given contract size.

Formula for pip value (when quote currency = INR): PipValue = (0.0001 × ContractSize) / ExchangeRate. Use the appropriate decimal for JPY pairs (0.01). This formula is standard across NISM study material.

SEBI classifies currency derivatives into two categories: (i) contracts on major currency pairs and (ii) contracts on exotic pairs where INR is the quote currency. Brokers must maintain separate risk‑management systems for each category, and they are required to publish daily margin and spread details.

For exam preparation, recall that only the six majors are permitted for direct trading on the NSE’s currency futures segment. Any pair that does not involve a major currency must be traded via the OTC market, which is outside the scope of the NISM certification.

Regulatory compliance checks often appear in scenario‑based questions, asking candidates to identify whether a given pair can be traded on a regulated exchange or if it requires OTC arrangements.