Currency pair
Family I · Instruments
Not to be confused with forex currency trading, major currency pairs, exotic currency pairs.
Currency pair is the unit of trading on the foreign exchange market: two currencies combined into a single quoted price. The first currency is the base, the second is the quote, and the pair's value states how much of the quote currency one unit of the base currency costs. Every pair is therefore a ratio, not a single instrument.[1]
Base, quote and direction
In the pair EUR/USD, the euro is the base currency and the US dollar is the quote currency. A price of 1.0850 means one euro costs 1.0850 US dollars. Buying the pair means buying the base and simultaneously selling the quote; selling the pair does the reverse. The base currency is normally the one whose amount is fixed at one unit, though market convention determines which currency occupies the base position for a given pair.
Because two currencies are involved, a position in a pair is always long one currency and short the other. There is no way to hold a pair without holding both sides.
Spread, pip and contract size
The quoted price has two sides: the bid at which the dealer buys the base, and the ask at which the dealer sells it. The difference is the spread. Price movement is usually counted in pips, where a pip is a fixed decimal increment that varies by pair and by quoting convention. Position size is expressed in lots, and the notional value of a lot also varies by broker and by instrument.
Profit and loss are calculated in the quote currency and then converted to the trader's account currency if the two differ.
Worked example
The result is denominated in US dollars because USD is the quote currency. If the account were held in another currency, the 500 USD would be converted at the prevailing rate before being credited.
Categories and conventions
Pairs are grouped by liquidity and by the economies involved. The most heavily traded combinations are known as major currency pairs, while less liquid combinations involving smaller or emerging-market currencies are called exotic currency pairs. Trading any of them is forex currency trading. Quoting conventions, trading hours and settlement practices differ between categories and between jurisdictions.
Often confused with
- forex currency trading
- Forex currency trading is the activity of buying and selling currencies, whereas a currency pair is the quoted instrument those trades are executed in; the pair is the thing, the trading is the doing.
- major currency pairs
- Major currency pairs are a subset of currency pairs limited to the most liquid combinations of widely traded currencies, while the general term covers every quoted combination including thinly traded ones; the visible sign is whether the pair contains a major reserve currency such as USD, EUR or JPY.
- exotic currency pairs
- Exotic currency pairs are currency pairs that combine a major currency with the currency of a smaller or emerging economy, so they are a category within the general term rather than a synonym for it; the visible sign is one leg being a currency outside the major group.
See also
References
- ↑ ISO 4217, the international standard that assigns each currency its three-letter code. The codes used in every pair quotation come from this standard, not from brokers.