A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes, coins, electronic balances in bank accounts, and central bank digital currencies (CBDCs). A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state.
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👉 Foreign currency in the context of Reserve currency
A reserve currency is a foreign currency that is held by governments, central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.
The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century and the first half of the 20th century. However, by the middle of the 20th century, the United States dollar had become the world's dominant reserve currency.
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Foreign currency in the context of Asset classes
In finance, an asset class is a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace. These instruments can be distinguished as either having to do with real assets or having to do with financial assets. Often, assets within the same asset class are subject to the same laws and regulations; however, this is not always true. For instance, futures on an asset are often considered part of the same asset class as the underlying instrument but are subject to different regulations than the underlying instrument.
Many investment funds are composed of the two main asset classes, both of which are securities: equities (share capital) and fixed-income (bonds). However, some also hold cash and foreign currencies. Funds may also hold money market instruments and they may even refer to these as cash equivalents; however, that ignores the possibility of default. Money market instruments, being short-term fixed income investments, should therefore be grouped with fixed income.
Foreign currency in the context of Hedge (finance)
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations.