Base Currencies and Variable Currencies
Spot rates are quoted as one unit of base currency against a number of units of variable currency (or quoted currency). The base currency is therefore the currency against which others are quoted.
X units of Variable Currency =1 unit of Base Currency
By convention when an exchange rate is named, the base rate is spoken or written first, and the variable currency second.
Examples
| | |
|---|
| Base Currency | Variable /Quoted Currency |
| US dollar/EUR | USD | EUR |
| Sterling/Yen | GBP | JPY |
If the spot rate for USD/EUR (dollar/euro) is 0.7763 Deutschemarks to one dollar, this would be written:
USD/EUR 0.7763
We can apply the same principal to other exchange rates. For example, look at the spot rates below:
SGD/JPY 63.3091
AUD/CAD 0.9272
You should be able to recognize, without knowing anything else about the currencies that these rates are:
63.3091 Japanese Yen to 1 Singapore dollar
0.9272 Canadian Dollars to 1 Australian dollar
Direct and Indirect Quotes
In the international markets, some currencies, by convention, are taken as the base currency for quoting exchange rates. Most currencies are quoted against the US Dollar.
Within a domestic market, it is sometimes more convenient to quote exchange rates the other way round.
- A direct rate is a rate that gives a variable amount of domestic currency against a fixed amount of foreign currency.
- An indirect rate is a rate that gives a variable amount of foreign currency per fixed amount (normally one unit) of domestic currency.
Example 1
The exchange rate between the Japanese Yen and Singapore dollar is SGD/JPY 63.3091.
For an FX dealer in Japan:
- The direct rate is 63.3091 Japanese yen to 1 Singapore dollar escudos to 1 peseta (or 6330.91 Japanese yen to 100 Singapore dollars)
- The indirect rate is 1/63.3091 = 0.0158 Singapore dollar to 1 Japanese yes.
The indirect rate is the inverse of the direct rate.
Example 2
A market marker quotes a European customer a USD/EUR rate of 0.7763/67, but the customer asks for the rate to be quoted as EUR/USD. What should the rate be?
Analysis
The EUR/USD rate is the inverse of the USD/EUR rate.
Buy EUR/sell USD:
USD/EUR rate = 0.7767
EUR/USD rate = 1/0.7767 = 1.2875
Sell EUR/buy USD:
USD/EUR rate = 0.7763
EUR/USD rate = 1/0.7763 = 1.2882
The EUR/USD rate is therefore 1.2875/1.2882
