Thursday, August 2, 2007

domestic currency, base currency... jargons

Key is to view first symbol NOT as a currency but as an asset. Perhaps the best example -- "XAG/CC1" means 1 ounce of silver quoted in your local currency CC1.

"Asset currency" -- Silver is the asset being quoted.
"Commodity currency" -- ditto
"Base currency" -- (Base-metal) is like the silver prices quoted on exchanges.
"Unit currency" -- exactly 1.0 unit of this currency is quoted in the "contract". This is the currency that's not changing in the equation like
1 USD = 1.234 SGD, becoming
1 USD = 1.235 SGD

An author said "first currency is like stock in equity market".
 
Tony pointed out the graph of CC1CC2 shows the strength of CC1 i.e. one unit of CC1 as a commodity. When CC1CC2 drops we intuitively see CC1 as weakening.

--Above are names of the first symbol; Below are names of the 2nd symbol--

"Domestic currency" -- means the currency you PAY to own the silver "asset". See warning below.
"Quote currency" -- means our silver is quoted-in this currency.
"Term currency" -- means the exchange rate is quoted-in Terms of this currency
"Premium currency" -- means the FX option premium is quoted-in this currency

Starting from a USD inventory,
- When you buy EURUSD, you buy euro, at pip price of 1.4444
- When you sell EURUSD, you sell euro, at price of 1.4444
- When you buy USDJPY, you SELL yen (and buy USD) at 99.99

=== warning Foreign currency is like the Silver. You quote prices in xx.xxx amount of local currency. This terminology is common in literature, but I find it confusing. Inside the United States, USDJPY is traded with JPY as domestic currency!

=== first currency (i.e. base currency) is like the "silver" that you buy or sell.
pip (percentage in point) is expressed-in quote-currency. If USD/SGD is moving from 1.1234 + 1 pip to 1.1235, then that 1 pip means 1 tiny "piece" of SGD.

"Base currency" means? The currency that's not changing in the equation like
1 USD = 1.1234 SGD, becoming
1 USD = 1.1235 SGD

If you see "2.23 DEM/GBP" price, think of it as
2.23 DEM=GBP or
2.23 DEM/GBP =1   i.e.
2.23 = GBP/DEM 

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http://www.linkedin.com/in/tanbin