How to Read Currency Pairs Using Base and Quote Currency

base and quote currency

If you have been to a foreign country, you must have physically dealt with foreign exchange and while purchasing anything from abroad you might have tried calculating the price of that object in Rupees.

However in the virtual world, when people trade in Forex, they use currencies as a trading asset in terms of base and quote currency.

Today in this article we will learn, 

  • What is a Currency Pair
  • What is Base and Quote currency?
  • What is Currency Appreciation and Depreciation?
  • Which are the currency pairs traded in India?
  • Some unique features of Indian Currency Derivative Market?
  • What is a Currency Pair?

Currency pair consists of two currencies. In the case of forex transactions, one currency will be sold while the other will be bought and vice versa.

As of current date, approximately 180 legal currencies are circulating throughout the world.

In India, trading is permitted in 7 Currency pairs. But the question is, how would we know which currency has been exchanged against which other currency?

To understand the difference, we’ll need to understand what is base and quote currency.

What is a Base and Quote Currency?

In Forex trading, it takes 2 currencies to form a pair.

And there are 2 parts to the ‘currency equation’:

  1. Base currency – the currency in the first part
  2. Quote currency – the currency in the second part

In USD/INR pair:

  • USD is the base currency – the first part of the ‘equation’
  • INR is the quote currency – the second part of the ‘equation’

So, how does it work?

The current trading price of USD/INR = 73.31 (as of 30th December 2020)

This means 1 USD = 73.31 Rupees

So, if you think USD/INR will go higher than 73.31 Rupees, you will go long.

Because you are expecting, 

  • The quote currency INR to weaken 
  • The base USD to strengthen.

And if you expect USD/INR will go lower than 73.31 Rupees, you will go short.

Because you are expecting, 

  • The quote currency INR to strengthen 
  • The base currency USD to weaken.

Now that the reading of Quote and Base currency is clear, let us take a step ahead and learn currency fluctuations!

What is Currency Appreciation and Depreciation?

Let us now learn how the price fluctuation in Forex is read! 

Currency Appreciation:

When more quote currency can be bought using one unit of the base currency, it is called currency appreciation.

Let’s understand this with an example,

In USD/INR pair, 

If the quote currency INR moves from Rs. 73.31 to Rs.74.31, we say that USD has appreciated by 1 INR, this means now you have to pay more for purchasing 1 unit of the base currency.

Currency Depreciation 

When we need fewer quote currencies to buy one unit of the base currency, it is called currency depreciation.

Let’s understand this with an example,

In USD/INR pair, 

If the quote currency INR moves from Rs. 73.31 to Rs. 72.31, we say that USD has depreciated by 1 INR, this means that now you will have to pay less to buy one unit of the base currency.

Which are the currency pairs traded in India?

In India, currency futures are permitted in the following currency pairs:

INR Pairs

USD/INR US Dollar/Indian Rupee
EUR/INR Euro/Indian Rupee
GBP/INR Great Britain Pound/Indian Rupee
JPY/INR Japanese Yen/Indian Rupee

Cross Currency Pairs

EUR/USD Euro/US Dollar
GBP/USD Great Britain Pound/US Dollar
USD/JPY US Dollar/Japanese Yen

Basics of Currency Trading in India:

  • All currency contracts are speculative i.e. you do not get the physical delivery of the currency. 
  • Forex trading is facilitated on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) & Metropolitan Stock Exchange of India Ltd.
  • The Currency market is regulated by SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India).
  • The lot size for (USD/INR), (EUR/INR) & (GBP/INR) is 1,000 units whereas the lot size for (JPY/INR) is 1,00,000 units.

Unique features of Indian Currency Derivative Market

Currency derivatives are exchange-based contracts and there are numerous unique features of Currency Derivatives contracts:

1. Hedging tool: Currency derivatives are considered as the best hedging tool for importers and exporters.

2. Low margin: Margins in currency derivative normally is in the range of 2% – 5% of the total contract value.

3. Low volatility: As compare to equity and commodity derivatives, currency derivatives have less volatility.

4. Highly liquid market: A high level of liquidity can be seen in all four currency pairs, i.e. USDINR, EURINR, GBPINR & JPYINR.

5. Longer contracts: In currency derivative market, twelve-monthly series future contracts are available for trading.

6. Synchronization with forex market: Indian currency derivative market is very well interconnected with international foreign exchange market.

Remember to refer to the top 10 Currency trading tips and the top Currency strategies before you start trading in the currency markets.

Conclusion: 

We hope that you have enjoyed the above article describing the base currency and quote currency, appreciation and depreciation of currencies and the unique features of Derivative Market etc. 

To be successful in currency trading, all you would need is discipline, patience, practice and the right partner like Samco which provides you with a robust currency trading platform.

Be with us to explore forex trading, and other money-making opportunities by Opening a currency trading account with Samco today and start creating wealth in the Indian currency markets. 

Happy Trading

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