Unless you aren't familiar with stocks, you understand that market capitalization is the share prices x the number of shares outstanding. It is used in various formulas and index weightings in the stock world.
Since obviously Forex doesn't have market cap (no shares), I'm trying to figure out if there is any equivalent measure that would be an appropriate replacement for market cap in comparing currencies (say in an weighted index). Most forex indexes like USDX are trade-weighted. Complicating matters is the fact that forex operates in terms of pairs. There is no value of the "Euro" or "Dollar" in isolation. It's value is only relative to some other currency or measure of wealth. I suppose you could pick a fixed currency, e.g. USD, as treat each quote such as EUR/USD as a share priced in USD. But then what do you do about the "number of shares outstanding"? There isn't really such a concept unless perhaps you could measure all reserves of said currency, which is probably a difficult, if not impossible task.
So is there a good proxy for market cap in forex and why? One theory I have is that the exchange rate itself is the market cap since free exchange of currency means that all money is all currencies simultaneously. Thus "the number of shares outstanding" term drops out of the equation. For example GBP/USD ~2x the "market cap" of USD/USD. Somehow, I doubt this theory though because one could say them same thing about the exchange of shares. Share price is not market cap so that seems to disprove it. What does anyone think of this? Or is something like trade or reserves more likely to represent the concept behind market cap?
Here is a table of global reserves. Maybe this is the answer. Let's assume it is and discuss how they would be combined with the exchange rate (say with a USD basis). There are two possibilities I can think of.
1) The reserve weights already are the "market cap". This might be the case since to obtain % they might have already equalized by some base currency.
In this case, if there are two boxes in front of you and you are told one contains 25% of the total wealth and it is in EUR bills and the other contains 75% of the total wealth and it is in USD bills, what does that mean? I imagine it could mean that if USD box was converted to EUR it would produce 3 times the EUR bills that were already in the original EUR box. In other words, the boxes contain different total units of bills such that the exchange rate equalizes at 1:3. So if I knew the total wealth was $100 USD, I would find $75 in the USD box and ~16 Euros in the EUR box.
2) The weights need to be adjusted by the exchange rate. For example, the 26.5% Euro would need to be multiplied by the EUR/USD rate.
In this interpretation, the boxes contain a 1:3 ratio of units, not value. So the EUR box might contain 25 Euros and the USD box would contain 75 Dollars. If this is what they mean by their weights then you would have to do some adjustment to get to "market cap". You would say that the capitalization weights were really 1.56 * 25 : 75. Or ~34% and ~66% respectively.
Unfortunately the table uses the word "composition" so I can't tell if they mean value (in some reference currency) or units. I suspect value. However, reserves may be a poor proxy after all since it doesn't account for money in the system.
Since obviously Forex doesn't have market cap (no shares), I'm trying to figure out if there is any equivalent measure that would be an appropriate replacement for market cap in comparing currencies (say in an weighted index). Most forex indexes like USDX are trade-weighted. Complicating matters is the fact that forex operates in terms of pairs. There is no value of the "Euro" or "Dollar" in isolation. It's value is only relative to some other currency or measure of wealth. I suppose you could pick a fixed currency, e.g. USD, as treat each quote such as EUR/USD as a share priced in USD. But then what do you do about the "number of shares outstanding"? There isn't really such a concept unless perhaps you could measure all reserves of said currency, which is probably a difficult, if not impossible task.
So is there a good proxy for market cap in forex and why? One theory I have is that the exchange rate itself is the market cap since free exchange of currency means that all money is all currencies simultaneously. Thus "the number of shares outstanding" term drops out of the equation. For example GBP/USD ~2x the "market cap" of USD/USD. Somehow, I doubt this theory though because one could say them same thing about the exchange of shares. Share price is not market cap so that seems to disprove it. What does anyone think of this? Or is something like trade or reserves more likely to represent the concept behind market cap?
Here is a table of global reserves. Maybe this is the answer. Let's assume it is and discuss how they would be combined with the exchange rate (say with a USD basis). There are two possibilities I can think of.
1) The reserve weights already are the "market cap". This might be the case since to obtain % they might have already equalized by some base currency.
In this case, if there are two boxes in front of you and you are told one contains 25% of the total wealth and it is in EUR bills and the other contains 75% of the total wealth and it is in USD bills, what does that mean? I imagine it could mean that if USD box was converted to EUR it would produce 3 times the EUR bills that were already in the original EUR box. In other words, the boxes contain different total units of bills such that the exchange rate equalizes at 1:3. So if I knew the total wealth was $100 USD, I would find $75 in the USD box and ~16 Euros in the EUR box.
2) The weights need to be adjusted by the exchange rate. For example, the 26.5% Euro would need to be multiplied by the EUR/USD rate.
In this interpretation, the boxes contain a 1:3 ratio of units, not value. So the EUR box might contain 25 Euros and the USD box would contain 75 Dollars. If this is what they mean by their weights then you would have to do some adjustment to get to "market cap". You would say that the capitalization weights were really 1.56 * 25 : 75. Or ~34% and ~66% respectively.
Unfortunately the table uses the word "composition" so I can't tell if they mean value (in some reference currency) or units. I suspect value. However, reserves may be a poor proxy after all since it doesn't account for money in the system.