Exotic Currency

An exotic currency is a foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large.

Exotics are not considered major currencies because they are not easily traded in a standard brokerage account. Additionally, exotic currencies are those of developing or emerging market countries. Examples include the Thai baht, the Uruguay peso, and the Iraqi dinari. On the other hand, major currencies include the U.S. dollar, the euro, the Canadian dollar and Swiss franc - all from developed countries with large economies and trading relationships. 

Factors that affect exotic currencies differ from major currencies. The plight of a major currency will depend on the health of its economy and the interest rate differential, while exotic currencies will often move on changes in the political landscape. In times of political instability, an exotic currency will depreciate at a rapid rate. 

Along with less liquidity, exotic currencies generally have higher volatility due to the nature of the fragility of the countries economy. Because of this, investors who wish to trade them will require higher margins in their brokerage accounts to allow for any significant adverse change in the rate of the currency.