Hi all,
In the CFA books, the general notation for an FX pair is price/base (e.g. GDP/USD = 0.63). This seems very intuitive and comprehendible. However, in the markets (e.g. yahoo finance, worldfirst, tradefair) the convention seems to be base/price (e.g. GDP/USD = 1.6). Can anyone confirm that I am correct and perhaps explain why there is a difference?
Thanks
Matt
hi Matt,
are you sure you got the market denotions correctly??? exchange rates are always quoted as PRICE/BASE. GBP/USD can never be =0.63 in one place and =1.60 in another. my suspicion is that you didnt observe the market denotions correctly, remember that if GBP/ USD =0.63, the the inverse ie USD /GBP will be =1.60 (ie 1/0.63). note that we have moved from GBP/ USD to USD /GBP. no matter how the exchange rate is quoted, the numerator will always be the PRICE and the denominator will always be the BASE. therefore in GBP/USD, USD is the base, whereas in USD/GBP, GBP is the base… hope this clarifies things…
Yes, you are correct. The standard convention in foreign exchange trading is Base:Price. Often time the colon is replaced by the / as seen on Yahoo finance and other pricing services. Don’t let this confuse you. It is not a “per” or division sign. Think of EUR:USD or EUR/USD as " the price of the Euro quoted in dollars. Often Econ and finance books will quote prices in the reverse as you noted. Eg. USD/EUR would mean “the price of the Euro quoted in dollars” or “Dollars per Euro”. You will see that in Level II the study materials will be quoted using the standard convention of Base:Price, however using the colon as not to confuse you. Understand the direction in which you are quoting thoroughly especially for Level II.
That is correct for the CFA exam, however the standard convention in foreign exchange trading is Base:Price. Often times the colon is replaced by the / as seen on Yahoo finance and other pricing services. THIS IS NOT NUMERATOR / DENOMINATOR but rather BASE / PRICE or BASE:PRICE. Always think of EUR:USD or EUR/USD as “the price of 1 Euro quoted in dollars.” However the CFA Level I books however you will see forex quotes as fractions, Price / Base. Don’t let this confuse you with the standatard convetion you see in FOREX Quotes by pricing services such as Yahoo Finance or Bloomberg. You will see EUR/USD on yahoo finance and EUR:USD on bloomber and both mean the same thng; Base/:Price, NOT PRICE:BASE. This will change in Level 2.
Very good observance MattMania. This was not an oversight or error by MattMania as Leanobabitse suggested. but rather a good observation of a rather confusing issue, for a level I candidate. For purposes of ths CFA exam, EUR:USD means “the price of one Euro quoted in dollars” and EUR/USD means “Euros per dollar”. HOWEVER IN FOREIGN EXCHANGE MARKETS QUOTES ARE ALWAYS SHOWN AS BASE:PRICE, EVEN IF THE COLON IS REPLACED BY A /. EUR:USD = EUR/USD ===> “The price of 1 euro in dollars”
Thanks guys, that’s really helpful and a relief. Cheers for the help!
Matt
thanks for the clarification PalacioHill 