Currency Pair

A currency pair is a financial term used in foreign exchange (Forex) trading that represents the exchange rate between two different currencies. It indicates how much of the quote currency is needed to purchase one unit of the base currency.

Understanding Currency Pairs

Currency pairs are divided into two categories: major currency pairs and cross currency pairs.

Major Currency Pairs

• These include the most traded currencies in the Forex market.
• They typically involve the US dollar (USD) as one of the currencies.
• Examples include EUR/USD (Euro/US Dollar), USD/JPY (US Dollar/Japanese Yen), and GBP/USD (British Pound/US Dollar).

Cross Currency Pairs

• These pairs do not include the US dollar.
• Examples include EUR/GBP (Euro/British Pound) and AUD/JPY (Australian Dollar/Japanese Yen).

Components of a Currency Pair

Every currency pair consists of two currencies:

• Base Currency: The first currency listed in the pair. It is the currency being bought or sold.
• Quote Currency: The second currency listed in the pair. It shows how much of this currency is needed to buy one unit of the base currency.

Example of a Currency Pair

Consider the currency pair EUR/USD:

• Base Currency: Euro (EUR)
• Quote Currency: US Dollar (USD)

If the exchange rate is 1.15, it means that 1 Euro is equivalent to 1.15 US Dollars.

Calculating Value of Currency Pairs

The value of a currency pair is often calculated using the following formula:
Value in Quote Currency = Amount in Base Currency * Exchange Rate

Calculation Example

If you want to purchase €1000 Euros:

• Exchange Rate: 1.15 (EUR/USD).
• Calculation: €1000 * 1.15 = $1150.

This means you would need $1150 to purchase €1000 at the current exchange rate.

Currency pairs are fundamental to Forex trading and serve as a way for traders to assess the relative value of different currencies for investment or hedging purposes. Understanding currency pairs is essential for anyone looking to enter the Forex market or engage in international trade.