What is Base Currency?

by Investing School on June 7, 2011

A term found in Foreign Exchange markets, base currency describes the first currency quoted in a currency pair. A currency pair is two currencies whose values are compared to each other. The second currency is called the quote currency.

Most commonly, the base currency is the domestic or accounting currency used in a transaction. It may also be called the primary currency. This currency is always given the value of 1 in these trades.

As an example, if you were considering a trade between the Hong Kong Dollar and the Euro, and the HKD was the base currency, you would see the trade listed as HKD/EUR. The Euro would be the quote currency, and the price would represent how much of the quote currency would be needed to get a single unit of the base currency.

Trading in Forex involves a certain amount of risk. There is no central market for the process. There are number of markets where different instruments are used; the instrument can be cash, ownership interest in an entity or a contractual right.

This creates a situation where the price of a particular currency might be different from one market to another. In reality, prices are kept intentionally close in order to prevent arbitrageurs from taking advantage of such situations.

The main center for Forex trading is London, although several other world markets participate as well. Currency trading takes place around the world, with new markets picking up the activity as others shut down throughout the day.

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