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What Is Parity, How Is Parity Calculated?
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What is parity,types of parity, how is parity calculated.When we compare the currencies of different countries with each other, we have actually made a parity calculation.When we go to an exchange office and we want to buy dollars or euros with our local money, that is, GBP, the value we see as the current dollar rate or euro rate is the parity value.This concept, whose name is mentioned quite often in the money markets today, is a name that forex traders know very well. When investing in a currency or forex transaction, we make this purchase by looking at parity.

The parity, which we often refer to in Global money markets and forex transactions, is the calculation of the value of two different countries ' money to each other.For example, the answer to the question of what is euro/dollar parity is actually the answer to the question of how many dollars 1 euro is worth.Again, in the same way, dollar/TL parity is expressed as how many Turkish lira is actually $ 1.

What Is Parity?

If you are going to say what parity is by its general definition, in short, it is the value of the currency used by one of the countries with different currencies against the currency of another country. Parity means equality as opposed to the word.

We must understand what parity means when it is called, that the value of currencies to each other at the current exchange rate is desired.When calculating this value, the ratio of the first typed currency to the second typed currency appears as a parity value.

What Are The Types Of Parity?

The value of a currency belonging to one country compared to the currency of another country is also called a currency pair. Parity is expressed in financial markets by the international codes of currencies belonging to countries. Value and rates are determined by taking into account the countries ' interest rates and economic conditions.

It seems that the pairs diverge between themselves. Accordingly, there are 3 types of parity: major, minor and exotic. Although there are 7 major currencies among the types of parity determined by the volume of trading in the money markets, the currencies other than this are also called minor.

Major Parity; since 80% of trading in financial markets occurs in major pairs, the most traded pairs are major pairs. In general, the currency used by countries whose economies have a larger volume is the major currency. Buying and selling is easier than other pairs, so the price difference is less. For this reason, it may be advantageous to buy and sell at a higher rate.

From major parities;

EUR / USD
USD/JPY
GBP / USD
USD / CHF
USD / CAD
AUD / USD is one of the most preferred.
A minor pair is a pair that has less trading volume than a major pair. Since the local currency is generally used in minor pairs, it is used by local investors as a weight. In minor pairs, the economic developments of both countries must be examined in order to realize a successful trading strategy.

Most traded minor currencies;

NZD
ROLL
SGD-shaped.
Exotic parity; parity is the lowest trading volume in parity. The Turkish lira, EURTRY, GDPTRY and USDTRY are considered among the exotic pairs. In exotic pairs, the difference between buying and selling prices can be quite high.

How To Calculate Parity?
In money markets, parity transactions are made by selling one currency and buying another currency at the same time. Although parity calculations are not a complex process, contrary to popular belief, they are performed with a simple fiction. Since the calculation of the value of two different currencies against each other will be considered, the calculation process is carried out by proportioning. In a simple way, the parity value can be calculated by dividing one currency into another.

Factors Affecting Parity

Pairs are affected by many factors. The value of parity, the overnight interest rates applied by central banks, the mobility in economic data, and the developments in countries in political and economic terms move up and down and are affected.

Interest rates applied by central banks are carried out in order to ensure financial stability and to keep the currency used in balance. In this context, it can lower or increase interest rates. The most important factor for increasing the value of money is the raising of interest, which will be applied by central banks. In other words, interest in that currency also increases when the interest rate increases.

Mobility in economic data allows you to learn about the economic situation of countries, as well as determine the state of markets. Economic data are non-agricultural employment, inflation and gross domestic product data.

Developments in political terms are one of the factors affecting parity values. Trade and political wars, conflicts and embargoes, and policy variability between countries have a very high impact.

In addition, one of the factors affecting parity is volatility. Volatility is changes in the price of a product over a certain period of time. Products with high volatility are less preferred than products with low volatility. Investors generally prefer products with low volatility.
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