What Is a Currency Basket?
A currency basket is a set of several currencies with different weightings. It is often used to set the market value of another currency, a practice commonly known as a currency peg. Forex traders may also enter basket orders to trade several currency pairs simultaneously.
Understanding Currency Baskets
Unlike other market participants, commercial corporations are part of the 10% of market players who do not partake in the Forex markets looking for profit. Instead, they do so for the sake of hedging risk. Such corporations make transactions in both the futures and spot markets for their daily operations. They need it to pay suppliers for raw materials and pay employees from different countries.
For example, Corporation A (a US-based firm) needs to buy steel from Australia but needs Australian dollars to complete the transaction. The company will then buy AUD at the spot market so that they can complete the transaction.
Another example would be a company needing steel six months from now. The problem is that the company will have to deal with potential changes in currency rates if they decide to buy them. To protect itself from potential currency risks, the company can buy a futures contract to fix the exchange rate. While the company may miss out if the AUD weakens over the next six months, it also protects itself just in case the currency appreciates. Thus, the use of futures contracts helps to eliminate or limit currency risks.