A:

When reading currency quotes, you have probably noticed that there is only a single quote for a pair of currencies. Currency pairs are quoted as such because a currency is only valuable in relation to another currency. The value of a domestic good in an open market is very easy to determine - just look at the current market price. In this instance, the value of the good is essentially being compared to the currency. Therefore, when quoting the value of a currency, it must also be valued against something else.

When looking at a currency quote, there is only one quoted number after a currency pair. For example, let's examine the currency pair CAD/USD with a quote of 0.9111. Before we can understand what this means, we must first understand how the quote works.

As you can see, the first currency in the pair is the Canadian dollar and the second currency is the U.S. dollar. In this quote, the Canadian dollar is referred to as the base currency, while the U.S. dollar is the quoted currency. In all cases, the base currency will always be worth one unit in relation to the quoted currency, regardless of whether the quote is indirect or direct. In our example, one Canadian dollar is worth 0.9111 U.S. dollars. Another way this currency pair could be quoted is the inverse; the quote for USD/CAD would be 1.0976 (1/0.9111). This quote tell us how many Canadian dollars can be purchased with one U.S. dollar.

As mentioned above, currencies are quoted in pairs because there must be something of value against which to measure them. They are also quoted in pairs because currencies are often exchanged for one another.

To learn more, read A Primer On The Forex Market and Dual And Multiple Exchange Rates.

RELATED FAQS
  1. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  2. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
  3. Where did the term 'pip' in currency exchange come from?

    The term pip is an acronym for percentage in point or price interest point. It measures a unit of change within a pair of ... Read Full Answer >>
  4. How do changes in national interest rates affect a currency's value and exchange ...

    All other factors being equal, higher interest rates in a country increase the value of that country's currency relative ... Read Full Answer >>
  5. What is the difference between pips, points, and ticks?

    Point, tick and pip are terms used to describe price changes in the stock market and other markets. While traders and analysts ... Read Full Answer >>
  6. What is the difference between extensive margin and intensive margin in economics?

    Trading on margin is not commonly done in stock trading except by professional investors and institutional traders. However, ... Read Full Answer >>
Related Articles
  1. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  2. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  3. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  4. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  5. Forex Strategies

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
  6. Forex Fundamentals

    Explaining Slippage

    Slippage occurs when a trade is executed at a different price than what was expected.
  7. Forex Education

    About the EGP, or Egyptian Pound

    The EGP, or the Egyptian pound, is the currency of Egypt.
  8. Forex Education

    The History Of Money: From Barter To Banknotes

    Money has been a part of human history for at least 3,000 years. Learn how it evolved.
  9. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  10. Forex Education

    Bretton Woods: How It Changed the World

    While the Bretton Woods system is no longer in place, it fundamentally changed the international monetary order.
RELATED TERMS
  1. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  4. ICE LIBOR

    See LIBOR
  5. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  6. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center