The currency of a developing economy, typically offering a high interest rate alongside wider spreads, thinner liquidity, event risk and the possibility of capital controls.
The trade-off is always the same: yield in exchange for tail risk. High nominal rates look attractive in a carry-trade until inflation is netted off, as described under real-interest-rate, and until the currency moves 15% in a fortnight and erases several years of carry.
Structural features to check are external debt denominated in dollars, reliance on portfolio inflows described under balance-of-payments, reserve adequacy, and whether the currency is deliverable at all. Where it is not, offshore exposure trades as a non-deliverable-forward.
Retail platforms classify most of these as exotic-pairs, with spreads several times those of a major and spread-widening that arrives before the news rather than after it.
Example: a currency paying 14% against a 5% dollar rate earns about 0.75% of carry a month. A single 9% devaluation wipes out a year of it, and the bid-ask-spread on the way out is likely to be double what it was on the way in.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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