Base currency — Definition Explained Simply | Examples & Role
Base currency is the currency against which other currencies are quoted and in which the trading volume is denominated.
Base currency is the currency used as the benchmark when determining the exchange rate of other currencies. In a currency pair, the base currency always comes first, and its value is expressed in terms of the second currency (the quote currency). For example, in the EUR/USD pair the base currency is the euro, while the quote currency is the US dollar.
According to international financial practice, the base currency is also the currency in which an investor keeps accounts and measures trading results. In banking and exchange operations, it is used to express the value of contracts, loans, or options.
Base currency in quotations
On the Forex market, quotations are always structured as: base currency / quote currency. If the EUR/USD rate is 1.10, it means that 1 euro (base currency) is worth 1.10 US dollars (quote currency). Thus, the base currency serves as the reference point for determining the relative value of another currency.
Base currency in financial instruments
In options, futures, and other derivatives, the base currency is the one in which the contract is made. It provides the calculation standard for the contract’s price and volume.
Examples
- In the GBP/USD pair, the base currency is the British pound, while the quote currency is the US dollar.
- In the EUR/JPY trade, the base currency is the euro, and the quote currency is the Japanese yen.
- In an option on USD/CHF, the base currency is the US dollar.