Lesson 2 of 9 · All lessons in this module
- The FX market: functions and participants
- Reading exchange rate quotes
- Percentage changes in exchange rates
- Nominal and real exchange ratesVideo lesson
- Why no currency regime is ideal
- The menu of exchange rate regimes
- Exchange rates, the trade balance and capital flows
- Capital restrictions
- Integrated cases: reading an FX and capital-flow brief
Lesson 2 of 9 · 13 min
Reading exchange rate quotes
An exchange rate A/B tells you how many units of the price currency A buy one unit of the base currency B, and every quote, bid and offer is about buying or selling that base currency.
In short
- A currency can be held on its own; an exchange rate is always the price of one currency in terms of another.
- In A/B notation, A is the price (quote) currency and B is the base currency, fixed at one unit. USD/EUR = 1.0800 means EUR1 costs USD1.0800.
- A direct quote uses the domestic currency as the price currency; an indirect quote uses it as the base. One is the reciprocal of the other.
- Market codes name the base currency first (EURGBP = GBP per EUR); a three-letter code such as EUR means the rate against the US dollar.
- Dealers quote a bid (they buy the base currency) and a higher offer (they sell it); most rates use four decimals, yen rates two.
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