My blog
will currently be based on Part 1 FRM exam of GARP.
This post discusses the basics - what is base and quoted currency? how currency quotes are read and the benefits to long and short position when a currency strengthens/weakens!
The value of a currency is expressed in terms of its
comparison with another currency.
A Foreign exchange trade involves simultaneous buying
of one currency and selling of another currency.
Base
and quoted currency
In a currency pair of EUR/USD the EUR is known as the base
currency and USD is called quoted currency.
Purchasing a currency pair is buying the base currency and selling the
quoted currency. Conversely, to sell a currency pair, the base currency is sold
and quoted currency is bought.
Currencies are quoted in two ways.
1. US dollars per one unit of foreign currency. For example, .9557 USD per CAD
2. CAD/USD = .9557 [This is a direct quote where CAD
is the base currency and USD is quoted currency.]
Direct quote is expressed as ‘number of quoted/domestic
currencies needed to buy one foreign currency’. It denotes you need USD .9557 to buy one CAD (Canadian
dollars).
For a US dealer, EUR/USD = 1.35 is a direct quote
For a Canadian dealer, USD/CAD = 1.0463 is a direct
quote.
For a Canadian dealer, CAD/USD = 0.9557 is indirect quote. [=1/1.0463]
For a Canadian dealer, CAD/USD = 0.9557 is indirect quote. [=1/1.0463]
For an Indian dealer, USD/INR = 63.29 is a direct quote.
Strengthening
vs Weakening of a Currency
A year ago, EURO/USD was quoting at 1.27 while currently
it is quoting at 1.35 approx.
You needed 1.27 USD to buy one EURO a year ago and now
you need 1.35 USD.
This shows EURO has become expensive, meaning the
currency has strengthened or appreciated compared to USD.
However, this strengthening of EURO is against USD alone and need not be against other currencies.
However, this strengthening of EURO is against USD alone and need not be against other currencies.
