Let's get familiar with currency exchanges and types of quotes.
Currencies that participate in the international exchange are the main product in the Forex market.
According to the globally accepted standard, currencies are represented by three-digit code number (first two letters denote country, and the last - currency of the country). Below you can see currencies which are used in international transactions:
You probably have already heard the term currency "exchange rate".
Now it is time to figure out what it stands for.
Exchange rate – is the cost at which one currency can be bought or sold in terms of another currency.
Have a look at the example below:
or EUR/USD = 1.2484 – means that you need 1.24 U.S. dollar to purchase 1 euro.
It is getting even simpler further: currencies, involved in exchange rate formation, are called currency pair. Whereas specific value of the exchange rate, declared by seller or buyer at a certain period of time, when they are ready to make a transaction, is called currencyquotation.
Let's look closer at major currency pairs. They are heavily traded so it is always easy to buy or sell them:
EUR/USD – Euro to U.S. dollar;
GBP/USD – British pound to U.S. dollar;
USD/JPY – U.S. dollar to Japanese yen;
USD/CHF – U.S. dollar to Swiss franc.
Have you noticed that all these pairs have something in common?
Exactly! The U.S. dollar is presented in each currency pair. The fact is the U.S. dollar has a status of the major reserve currency and therefore basic value of all currencies in the world is expressed with respect to the dollar. For the same reason there are two types of quotations:
|DIRECT QUOTE||INDIRECT QUOTE|
|When US dollar comes first||When US dollar comes second|
Cross rate – is the correlation between currencies value, arising from their exchange rate against the U.S. dollar. Thus, a value of one country currency can always be expressed in a currency of any other country. Any currency pair, formed without the US dollar, is called cross rate. For example:
EUR/CHF – Euro to Swiss franc;
GBP/JPY – British pound to Japanese yen.
Finally, you must remember a very important rule. In any currency pair the first currency is called base currency and the second currency, which expresses the value of the base one, is called quoted currency. Please, have a look at the example below:
|CURRENCY PAIR||BASE CURRENCY||QUOTED CURRENCY|
|Designation||The one that comes first||The one that comes second|
In EUR/USD, euro is the base currency, whereas the U.S. dollar is the quote currency. In USD/JPY, the U.S. dollar is the basic currency and the Japanese yen is quoted one.