Base currency
Also written BC · Base currency (BC)
The first currency in a pair, fixed at one unit and priced in the second (quotation) currency. In USDINR the base is USD, so the quote is the rupee price of one dollar.
In plain language
Every foreign exchange trade swaps one currency for another, so every quote involves two currencies. You cannot call them "foreign" and "domestic", because the dollar is foreign in Mumbai and domestic in New York. The market names them by their role instead.
- The base currency (BC) is the currency being priced. Its amount is fixed, generally at one unit.
- The quotation currency (QC) is the currency doing the pricing. Its amount changes as the market moves.
The base currency is written first. In USDINR, USD is the base and INR is the quotation currency, and a quote of 83 means one US dollar costs 83 rupees. In GBPUSD = 1.34, GBP is the base and USD is the quotation currency — so the same dollar can be the base in one pair and the quotation currency in another.
What is quoted anywhere in the FX market is always the price of one unit of base currency, expressed in the quotation currency.
How it works
Conventions (Chapter 1, section 1.3.2):
- In the interbank market, USD is the universal base currency, except against EUR, GBP and AUD, where those currencies are the base.
- In a direct quote, the foreign currency is the base and the local currency is the quote. In an indirect quote it is the other way round. Most pairs using the US dollar are direct quotes.
- JPYINR is a special case in quotation: exchanges quote the rupee price of 100 JPY, not 1.
Appreciation and depreciation read off the base currency (section 1.3.5). If the pair rises, the base currency buys more of the quotation currency, so the base has appreciated and the quotation currency has depreciated. USDINR moving from 82 to 83 means USD strengthened and INR weakened.
Direction of a trade follows from that. Buying a pair is bullish on the base and bearish on the quote; selling it is the reverse. Chapter 2 states it for derivatives: a participant who expects the base currency to appreciate takes a long position; one who expects it to depreciate takes a short position.
Two-way quotes are also priced per unit of base currency, and always from the market maker's side: the bid is the price at which the bank buys the base currency, the offer is the price at which it sells.
A worked example
1. Reading the quote. A bank quotes USDINR 75.0550 / 75.0600 to a merchant (the workbook's figures).
| Price of 1 USD (base) in INR (quote) | Who gets it | |
|---|---|---|
| Bid | 75.0550 | A merchant selling USD receives this |
| Offer | 75.0600 | A merchant buying USD pays this |
An importer buying USD 10,000:
Rupees paid = 10,000 × 75.0600 = Rs 7,50,600
An exporter selling USD 10,000:
Rupees received = 10,000 × 75.0550 = Rs 7,50,550
The Rs 50 gap on USD 10,000 is the spread of 0.0050 per dollar.
2. Reading the move. USDINR goes from 82 to 83. The base currency (USD) now buys one more rupee: USD appreciated, INR depreciated. A trader who expected this would have gone long USDINR.
3. The same currency as the quote. GBPUSD moves from 1.3365 to 1.3300. Here USD is the quotation currency. The base (GBP) buys fewer dollars, so GBP depreciated and USD appreciated — even though the number went down.
Why NISM asks about it
Chapter 1, section 1.3.2 (Base Currency / Quotation Currency), defines the terms; sections 1.3.4 and 1.3.5 build two-way quotes and appreciation / depreciation on them; section 1.4 uses them to derive cross rates. Chapter 2, section 2.5, links base-currency views to long and short positions. The Chapter 1 sample questions test exactly this: which currency is the base, and at what price an exporter can sell USD from a two-way quote.
Common exam traps
- The base currency is the first currency in the pair, not the second.
- Quotes are per unit of base currency — except the 100-unit JPY convention for JPYINR.
- A rising pair means the base appreciated. When USD is the quotation currency (EURUSD, GBPUSD), a rising pair means USD weakened.
- Bid and offer are from the market maker's side. The customer sells at the bid (lower) and buys at the offer (higher).
- USD is the interbank base currency except against EUR, GBP and AUD.
- "Long USDINR" is simultaneously bullish USD and bearish INR — one position, two views.
Check yourself
1.Which of the following is true about a currency pair?
- a)Base currency is the first currency in a currency pair
- b)Base currency is the second currency in a currency pair
- c)Quotation currency is the first currency in a currency pair
- d)Exchange rates are quoted in per unit of quotation currency
Show the answer
Answer: (a) Base currency is the first currency in a currency pair
For the currency pair, the standard practice is to write the BC code first followed by the QC code.
What each one is: the BC is the currency that is priced, and its amount is fixed generally at one unit. The other currency is the QC, which prices the BC, and its amount varies as the price of BC varies in the market.
So options B and C simply reverse the convention.
Option D reverses the pricing convention. What is quoted throughout the FX market anywhere in the world is the price of BC expressed in QC — that is, per unit of the base currency, not per unit of the quotation currency.
Two worked illustrations from the chapter: in USDINR, USD is the base currency and INR is the quoted currency; and what is quoted in the market is the price of one USD expressed in INR. And GBPUSD = 1.34 means that one unit of GBP is valued at 1.34 USD.
The same currency changes role depending on the pair: in case of USDINR, USD is base currency and INR is quotation currency while in case of GBPUSD, USD is quotation currency and GBP is base currency.
And the order matters when you want the reverse price: if you want the price of INR expressed in USD, then you must specify the currency pair as INRUSD.
One market convention worth learning alongside: in the interbank market, USD is the universal base currency except when it is quoted against Euro (EUR), Sterling Pound (GBP), Australian Dollar (AUD).
2.USDINR moves from 82.00 to 83.00. Which statement is correct?
- a)The rupee has appreciated and the dollar has depreciated
- b)The dollar has appreciated and the rupee has depreciated
- c)Both currencies have appreciated
- d)Neither currency has changed in value, only the quote has changed
Show the answer
Answer: (b) The dollar has appreciated and the rupee has depreciated
Whenever the base currency buys more of the quotation currency, the base currency has strengthened / appreciated, and the quotation currency has weakened / depreciated.
In USDINR, USD is base currency and INR is quotation currency. At 83, one dollar buys more rupees than at 82.
The workbook states this case directly: base currency appreciates when it can buy more units of quotation currency. For example, USD INR moves from 82 to 83 it means the base currency (USD) strengthens and the quotation currency (INR) weakens.
The reverse rule: quotation currency strengthens when the base currency buys lesser units of quotation currency. For example, USD INR moves from 83 to 82 it means the base currency (USD) weakens and the quotation currency (INR) strengthens.
Option C cannot be right in a currency pair — one side rises only as the other falls. That is what distinguishes currency from every other asset class in this exam.
Option D misses that the quote is the relative value.
In trading terms: when you buy a currency pair, clearly it implies that you expect the value of the pair to go up... This translates to you being bullish on the base currency and bearish on the quotation currency at the same time.
And one caution the chapter is careful to add: appreciation and depreciation of one currency is always in terms of other currency. Hence, it is possible that USD can appreciate against INR, however at the same time USD may depreciate against EUR.
So "the rupee is weak" is never a complete statement until you say weak against what.
3.EURUSD is 1.1125 / 1.1150 and USDINR is 75.64 / 75.65. What is the EURINR cross rate?
- a)84.3498 / 84.1495
- b)84.1495 / 84.3498
- c)67.98 / 68.00
- d)1.1125 / 1.1150
Show the answer
Answer: (b) 84.1495 / 84.3498
Therefore, the cross rate for EURINR would be 84.1495 / 84.3498.
The buy side: to buy 1 unit of USD, the applicable price is 75.65 INR (offer side)... The price for buying 1 unit of EUR is 1.1150 USD (offer side). Therefore, price of buying 1.1150 units of USD would be 1.1150 x 75.65 INR i.e. 84.3498 INR.
The sell side: the price comes to 84.1495 (1.1125 x 75.64).
So offer × offer gives the buying price and bid × bid gives the selling price.
Option A has the two the right way round arithmetically but presented in the wrong order. The bid price (lower price) is quoted first followed by offer price (higher price) — a two-way quote always reads low/high.
Option C divides instead of multiplying. That is the JPYINR method, which applies only because in case of JPYINR, USD is base currency for both the currency pairs. For EURINR, USD is the quotation currency in EURUSD and the base currency in USDINR, so the two multiply cleanly.
The conversion path is what tells you which sides to use: you need to sell INR to buy USD; and further sell the USD received to buy EUR. It is important to identify this FX conversion path of selling one currency and buying another to calculate the cross rate.
GBPINR works the same way: assume GBPUSD price as 1.3300 / 1.3325 and USDINR as 75.64 / 75.65, the price for GBPINR works out to be 100.6012 / 100.8036.
And the method reverses: using EURINR and USDINR rate, EURUSD rate could be calculated.
Where this is taught
Free preparation for NISM Series IRelated terms
- Bid priceIn a two-way quote, the price at which the market maker will buy the base currency from you — always the lower of the two prices, and always quoted first.
- Cross rateThe price of a currency pair that is not directly quoted, derived by combining two pairs that share a common currency — EURINR from EURUSD and USDINR, for example.
- Currency futuresA standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
- Quotation currencyThe second currency in a pair — the one that does the pricing. Its amount varies as the market moves, and a contract's value is always expressed in it.
- Vehicle currencyA common third currency — most often the US dollar — through which two other currencies are traded, instead of trading them directly against each other.
- Exchange Rate RiskThe risk that an investment’s value, measured in the home currency, changes because foreign exchange rates move. A falling rupee raises returns on foreign assets; a rising rupee cuts them.
- Interest rate parityThe principle that a currency pair's forward or futures price differs from spot by the two currencies' interest rate differential, so borrowing in one and lending in the other earns no riskless profit.
- Triangular arbitrageExploiting a misalignment among three exchange rates by converting currency A to B, B to C and C back to A, ending with more of A than you started with.
- Card rateThe rate a bank fixes at the start of the day for buying and selling foreign exchange from retail customers, applied regardless of intraday movement in the currency.
- Base and quoting currencyIn a currency pair like USD/INR, the first currency is the base currency and the second is the quoting currency — the rate shows units of the quoting currency per one unit of the base currency.