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Agio is defined as a benefit, commission or profitability obtained with the exchange of currency or the discount of means of payment such as I will pay. In relation to the stock market is the difference between the parity and market value of a security.
The word agio actually has several definitions. We have focused on the two most important ones, the one related to the foreign exchange market or the stock market. In this way, it would be a kind of prize that is obtained by the difference between the real value of the paper money or of a title and its market value. There is another word “deviation” that is the opposite of the previous one. It consists of taking advantage of the depreciation of certain securities to pay a lower price for them.
We should not confuse any of these concepts with the speculation. The latter aims at abusive financial speculation. In this case, there is damage to third parties and insider information is used for their purposes. Therefore, the difference is from an ethical and even legal point of view.
Origin of Agio
Its etymological origin is Italian, Celtic and Germanic. On the one hand, the Italian word “aggio” which means currency exchange, although another meaning is added, of the verb add. On the other, the Celtic and Germanic root “azh” or “az”, which means something that is easy or comfortable.
Regarding the historical origin, it all started with the gold standard, which began in the 19th century and meant a revolution. The bills and coins had a reference in this precious metal and this allowed to issue paper money. In this way, gold was delivered in exchange for tickets. This was the origin of money that we know today. This exchange rate was relatively constant and this index was known as the “perfect reference pair.”
In the commercial capitalism of the 19th century, commerce was the main activity. In this way, the market exchange rate of the two-country currencies was established by means of the trade balance. This used to be different from the perfect pair, standing above or below and allowing to obtain a profit or sour. From here, the term was generalized for foreign exchange transactions or securities, among others.
Examples of Agio
Finally, we show you some examples of agio, according to its two main definitions. The one related to the money market and the stock market.
- In the nineteenth century the market value of the currency of the two major European powers (England and France) did not usually coincide with that of the gold standard reference. In the end it was the, as we have already mentioned, it was the trade balance that established the exchange rate and its fluctuations caused the appearance of a risk premium called Agio.
- In the stock market, the difference between the market value and the parity gives rise to the appearance of Agio. This is expressed in percentages. For example, if the market value of is 1,000 monetary units and the parity of 1,100, the year is 10%.