Base Currency - Explained
What is Base Currency?
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Table of ContentsWhat is a Base Currency?How Does a Base Currency Work?Parts of a Currency PairSimultaneous MovementAcademics Research on Base Currency
What is a Base Currency?
The base currency is the first currency in a forex pair quotation referred to as the transaction currency. The second of the pair is the quote currency or the counter currency. The base currency can be used to represent all profits and losses of a company. This currency also functions as a company's domestic currency for accounting purposes.
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How Does a Base Currency Work?
A base currency as used in the forex market indicates how much of the quote currency is needed to purchase one unit of the base currency. For example, in a pair of CAD/USD, the Canadian dollar (CAD) is the base currency while USD is the quote currency. As exemplified above, currency pairs use codes to indicate a specific currency. These three-letter codes are created and enforced by the International Organization for Standardization with provisions in ISO 4217. However, the most popular currency codes include USD, a description of the U.S. dollar, EUR for the euro, JPY for the Japanese yen, GPBfor the British pound, AUD for the Australian dollar, CAD for the Canadian dollar and CHF for the Swiss franc. These codes in a currency pair can be marked differently by using a slash or replaced with a period, a dash or nothing.
Parts of a Currency Pair
Currency pairs are usually marked with a slash or without a mark, for example, GBP/AUD, EUR/USD, USD/JPY, GBPJPY, EURNZD, and EURCHF. Where GPB is the base currency and AUD is the quote currency. This applies to others too. Currency pairs state how much of the quote currency is required to buy one unit of the provided base currency. This is done when the pair has an exchange rate. For example, an EUR/USD = 1.55 means that _1 is equal to $1.55. This by default states that in order to purchase _1, an investor must pay $1.55. The currency pair quotation is read in the same manner when selling the base currency. If a seller wants to sell _1, he will get $1.55 for it.
Investors purchase and sell currencies, this accounts for the reason why currency pairs are indicated as pairs. Investors purchase thinking that the base currency will appreciate compared to the quote currency. In the same vein, this pair can be sold if they think that the base currency will depreciate in value compared to the quote currency. An example of this is when an investor purchases EUR/USD, this simply means that the investor is purchasing euro and selling U.S. dollars simultaneously.