Forex Science, Currencies and Instruments

Forex Science

Currencies and Instruments

Currencies, like equities and bonds, have pairs that are very liquid and those that are not so liquid. The liquid currencies are characterized by their country's stable economy and political system.

Since the European currencies unified and created the euro, the currencies that are most liquid now include US dollar, Japanese yen, British pound, Euro, Canadian dollar.

It is estimated that activities in these currencies comprise more than 80% of the daily foreign exchange volume.

Foreign Currency Symbols

Currencies have their own symbols that distinguish one from another. In Forex, the price of a currency pair is simply the value of one currency against the value of another.

A currency pair includes the "name" for both currencies, separated by a "/". The "name" is a three letter acronym. The first two letters, in most cases, identify the country, while the last letter denotes the unit of currency for that country.

For example,

  1. USD = United States Dollar 
  2. GBP = Great Britain Pound 
  3. JPY = Japanese Yen 
  4. CAD = Canadian Dollar 
  5. CHF = Confederatio Helvetica (Latin for Swiss Confederation) Franc 
  6. NZD = New Zealand Dollar 
  7. AUD = Australian Dollar 
  8. NOK = Norwegian Krona 
  9. SEK = Swedish Krona

Since the European Euro has no specific country attached to it, it goes simply by the acronym EUR. By combining one currency, EUR, with another USD, you create a currency pair EUR/USD.

The Base and Counter Currency

The Base Currency is the first currency in a pair. It is always the dominant currency in the pair. The Counter Currency is the second currency in a currency pair.

Euro The euro is the dominant base currency against all other global currencies. As a result, currency pairs against the EUR will be identified as EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD, etc. The EUR acronym will always appear first in the sequence.

Pound Inggris The British Pound is next in the hierarchy of currency name domination. The major currency pairs versus the GBP would, therefore be identified as GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD. Apart from the EUR/GBP, expect to see GBP as the first currency in a currency pair.

USD The USD is the next dominant base currency. USD/CAD, USD/JPY, USD/CHF would be the normal currency pair convention for the major currencies.

Since the EUR and the GBP are more dominant in terms of base currencies, the dollar is quoted as EUR/USD and GBP/USD.

Knowing the base currency is important as it determines the values of currencies (notional or real) exchanged when a foreign exchange deal is transacted.
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