Let’s take a look at the currency pair nicknamed The Bird or the NZD (or New Zealand Dollar) and USD (or US Dollar).
As of late 2015, the exchange rate for the (indirectly quoted) pair is around 1 NZD / 0.67 USD. It follows that NZD is referred to as the base currency (or the currency that is intended to be bought or sold); USD is referred to as the quote or counter currency (or the unit of currency required for payment).
Here’s a compilation of other facts about currency quotes:
1. Currency pairs can be quoted in 2 ways: they can be presented as either direct quotes (also known as priced quotes) or indirect quotes (also known as quantity quotes). Direct currency quotes state the foreign currency price in relation to domestic currency price. Indirect currency quotes, on the other hand, state the domestic currency price in relation to foreign currency price.
In an example similar to the one above, let’s say that the domestic currency is the NZD and the foreign currency is the USD. A direct currency quote, in such a case, is USD/NZD. If this were quoted indirectly, it’s NZD/USD; furthermore, it means that with 1 NZD, you can purchase 0.67 USD.
2. Upon encounter with a currency pair that does not have the USD as either its base or its counter, the currencies are referred to as cross currencies. The list of examples of such currencies are EUR (or Euro) /
GBP (or Great Britain Pound) and CHF (or Swiss Franc) / JPY (or Japanese Yen).
3. Quoted currencies are known to come with bid prices and ask prices. In a currency quote, the first figure is the bid price; the second figure is the ask price. Here is an example involving the NZD/USD pair:
NZD/USD = 0.6700/10
Bid price = 0.6700
Ask price = 0.6710
When setting a short position, the bid price is involved; it is the price that a dealer is required to pay When establishing a long position, the ask price is the price required by a dealer. It’s important to note that the figures will always be expressed in terms of the base currency.
In this regard, the knowledge of spreads is important in currency exchange; it is important when learning about the correct way to go on with your forex transactions. Particularly, the spread is the difference between a currency pair’s bid price and ask price; in the example above, the spread is 10 pips.
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