When we have a spot rate given i.e. USD/GBP, I understand the GBP is the base currency and the USD is the price currency. However, When I am going to calculate a forward rate, Is the base currency considered the foreign currency or the domestic currency? Dumb question I know and thanks in advance.
I think in USD/GBP the GBP is the domestic currency and USD the foreign currency.
One of the biggest problems candidates have in learning currency exchange is that the people who teach it cannot stick to one convention for naming the currencies. Sometimes it’s foreign/domestic, other times it’s price/base. I’m sure that one of these days somebody will call them the red currency and the green currency.
There is no universal rule about which currency is foreign and which is domestic (in general, in problems; in the real world, your currency is domestic, and the other one is foreign). You may see quotes with FC/DC, and you may see quotes with DC/FC.
So your question’s not stupid; the way finance people talk about currencies is stupid.
My suggestion is to forget about the labels “domestic” and “foreign” altogether. Think about price currency and base currency (and, further, think of the base currency as a commodity, such as oil or gold or pork bellies), and always write out both currencies when you’re working with quotes.
I wrote an article on pricing forwards that may be of some help: http://financialexamhelp123.com/covered-interest-rate-parity-irp-pricing-currency-forwards/