In this article, We learn about "Currency Basket ".Let's Go!
A Currency Basket , also known as a currency composite index or currency index, is a collection of different currencies grouped and weighted according to a specific method.
The main purpose of a currency basket is to provide a benchmark or measure of a currency's value relative to a group of other currencies, rather than a single currency pair.
Central banks, multinational corporations, and investment funds often use currency baskets to manage their currency exposures, hedge currency risks, or implement investment strategies.
For example, the International Monetary Fund (IMF) uses a currency basket called the Special Drawing Rights (SDR) to supplement the official reserves of its member countries.
The Special Drawing Rights consists of five major currencies: the US dollar, the euro, the Chinese yuan, the Japanese yen and the British pound, with each currency assigned a specific weight based on its importance in international trade and finance.
Currency traders and investors can also use currency baskets to diversify their portfolios, hedge risks, or gain exposure to specific regions or sectors of the economy.
For example, a trader who wants to invest in Asian markets might create a currency basket consisting of multiple Asian currencies (such as the Japanese yen, Chinese yuan, and Korean won) to spread the risk across multiple currencies, rather than focusing on single currency pair.