What Are European Terms?
European terms are an alternative to American terms, or direct terms, for foreign currency exchange quotations. European terms refer to how much of a foreign currency is needed to buy one U.S. dollar. This methodology is used whenever one currency is exchanged for another, particularly when trading in the foreign exchange market.
- European terms refer to a foreign currency exchange quotation.
- It quotes the amount of a foreign currency needed to buy one U.S. dollar.
- Foreign exchange is quoted in currency pairs, where the first currency is the base currency and the second currency is the term currency.
- European terms always place USD in the base currency position.
- Foreign exchange is the trading of one currency for another with the potential of making a profit in the movement of exchange rates.
- When trading foreign exchange, traders should be aware that the futures market and the spot market often quote currency pairs in different terms, i.e. American terms versus European terms.
Understanding European Terms
When quoting currency pairs, you have the base currency and the terms currency. Currency pairs are represented as the following: base currency/term currency, or for example, USD/EUR. In European terms, USD is always placed in the base currency position, meaning how much of a foreign currency is needed to buy one U.S. dollar.
For example, assume there is a bid quote of USD/EUR at 1.3446 and an ask quote of USD/EUR at 1.3448. From the United States perspective, these quotes are given in European terms. The first would signify that the maximum a buyer is willing to pay for one U.S. dollar is 1.3446 Euros, whereas the second represents the minimum a seller is willing to receive for one dollar. In this case, 1.3448 Euros.
When you buy a currency pair you are buying the base currency and selling the term currency. Conversely, when you sell a currency pair you are selling the base currency and buying the term currency.
Foreign Exchange Trading and European Terms
Foreign exchange is the trading of foreign currencies. The foreign exchange market is the largest, most liquid market in the world. Traders can make a profit on exchanging currencies the same way they would by trading other assets. Buying a currency low and selling it high is the same goal as other investments when seeking positive returns.
When trading in foreign exchange, it is crucial for investors to understand the currency terms being represented. When trading currencies against USD, the currency is reported in either American terms or European terms, per standard practice.
For example, the Swiss franc (CHF) trades in European terms in the spot market. The currency pair is represented as USD/CHF. On the other hand, the British pound (GBP) trades in American terms on the futures market. It is represented as GBP/USD. Oftentimes the quote convention for futures is different than spot, and this is important for traders to know so that they are aware of the correct direction of their trade.