Premium account in Forex exchange trading refers to the actual amount paid more than a security or stock’s nominal or par value. In terms of funds, it refers to the fact that the buying and selling price of the closed-end fund market is higher than the value of the net assets of the fund unit. We usually say that a stock has a premium, which means there is still money after deducting various fees and other expenses. When we say how much premium space a stock has, we mean the price difference between our target price and the stock’s par value. Premium refers to the fact that the transaction price exceeds the security’s face value. Premium space refers to how much the transaction price exceeds the security’s face value.
The Forex exchange trading forward premium anomaly (from now on referred to as “FPP,” that is, the foreign exchange forward premium is negatively correlated with the future spot exchange rate) is considered to be one of the three major anomalies that violate the efficient market hypothesis. Rational expectations use the non-covered interest rate parity hypothesis to explain the foreign exchange forward premium anomaly. Some scholars believe that FPP is caused by model setting bias. There are three aspects to the FX forward premium anomaly that needs to be explained: volatility, persistence, and unbiasedness. The Uncovered Interest Parity Hypothesis (UIP) is based on the arbitrage principle. The arbitrage principle is based on the joint assumptions of an efficient market, rational expectation, and risk neutrality, which believes that investors will put funds in the foreign exchange market in order to take advantage of small interest rate differences.
Second, Forex exchange trading forward premiums originate from spot exchange rate fluctuations and speculative premiums between financial markets. Speculative yields in stock and futures markets have an explanatory role for foreign exchange forward premiums. Foreign exchange futures prices act as a weather vane for forwarding foreign exchange prices. The research conclusion shows that investors in the forward foreign exchange market will consider the speculative premium of multiple financial product markets when making decisions, leading to forwarding foreign exchange risk transmission among financial markets.
Why do stocks and Forex exchange trading have a premium?
Since the advent of trade activities in ancient times, the concept of premium has been deeply rooted in people’s hearts. In modern times, it has appeared frequently in the financial field, and many financial products are inseparable from the concept of premium. So, what are the mysteries behind the premium?
In a literal sense, premium means simply raising the price. Specifically, in the financial field, it means that the transaction price of a security exceeds the face value of the security, and the excess is called the premium space.
In stock offerings, premiums are the norm. The company laws of many countries prohibit the issuance of shares below par. Therefore, when the stock is first issued, it is often issued at a premium over its face value. The specific price is determined through negotiation between the issuer and the underwriting securities company.
Generally speaking, a high premium allows companies to raise more funds with fewer shares, reducing the cost of financing. But this has also prompted some companies to resort to falsification, making their faces swollen and fattening, resulting in an overly frothy stock market. For Investors, if the stock premium is too high, it means that the investment cost will increase, which may affect the enthusiasm for buying. At the same time, the high premium also increases the underwriter’s issuance risk.
In addition to stocks, there is also a premium in foreign exchange trading, but it has a new name called “premium.”
The premium reflects changes in currency exchange rates in the foreign exchange market. When the forward exchange rate of a currency is higher than the current spot exchange rate, it is called the premium. Generally speaking, most of the forward premiums are currencies with lower interest rates.
In general, the premium is a common phenomenon in the financial field. For example, buying stocks is riskier than time deposits, and the part where the stock returns are higher than the deposit returns is a risk premium.
In fact, premiums can also be seen everywhere in our daily lives. For example, Internet celebrity milk tea and word-of-mouth mask are higher than similar products on the market. This is often referred to as the brand premium. Premium is no longer just a price increase, and it reflects our new thinking about value.
The foreign exchange trading platform refers to some independent traders with certain strength and reputation in the foreign exchange market, which continuously quote the buying and selling price of the currency to investors (that is, two-way quotation), 24-hour trading except statutory holidays, and accept investment at this price the buyer’s trading requirements. The platform can hold its own funds to conduct transactions with investors. When the market transactions are rare, the buyers and sellers do not need to wait for the counterparty to appear; as long as a “counterparty” is on the platform to undertake the transaction, the transaction can be concluded. In this way, uninterrupted buying and selling are formed to maintain the market’s liquidity.