# Reciprocal Currency

## What Is a Reciprocal Currency?

In the foreign exchange (forex) market, a reciprocal currency describes a situation where a currency pair involves the U.S. dollar (USD), but the USD is not the base currency; instead, it is the quote currency (also known as the counter currency).

## What Is a Reciprocal Currency Arrangement?

A reciprocal currency arrangement is an agreement between two nations to maintain a specific money supply of each other's currencies. This improves liquidity between the nations and in the global financial markets, allows for more efficient financial transactions, maintains reserve requirements, and sets exchange rates. Reciprocal currency arrangements are also known as swap lines.

## What Is a Currency Pair?

A currency pair quotes the value of two currencies with the value of one currency being quoted against the value of the other. The first currency in the pair is the base currency and the second listed currency is the quoted currency. Currency pairs reveal how much of the quote currency is needed to buy one unit of the base currency.

## How Do You Find the Reciprocal Exchange Rate?

A reciprocal exchange rate would be the inverse of the exchange rate. You would divide 1 by the current exchange rate of the two currencies for the inverse relationship. So for example, if the USD/EUR exchange rate was 0.89, to find the reciprocal exchange rate of EUR/USD, you would perform the following calculation: 1/0.89 to arrive at 1.12.

## What Are the Two Ways to Quote a Currency?

Currencies can be quoted as direct quotations or indirect quotations. A direct quotation is when one unit of a foreign currency is quoted in the corresponding units of the domestic currency. An indirect quotation is when one unit of a domestic currency is quoted in terms of the equivalent foreign currency.

## How Are Foreign Currency Options Quoted?

Foreign exchange options are priced as the intrinsic value + the time value. This is the FX option premium. The intrinsic value is the difference between the converted currencies utilizing the strike rate and forward rate.

## The Bottom Line

A reciprocal currency in foreign exchange trading is a currency pair where the USD is not the base currency but rather the counter currency. It is quoted in terms of U.S. dollars per unit of foreign currency. Reciprocal currencies are a large part of FX trading globally, with common reciprocal currencies being EUR/USD, GBP/USD, and AUD/USD.

Article Sources
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1. IG. "What Are the Top 10 Most Traded Currencies in the World?" Accessed Dec. 9, 2021.

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