FX Quoting Conventions

Someone tells you EURUSD is 1.0850. Fine — but 1.0850 of what, per what? Unlike a stock, an exchange rate has no natural units. It is a ratio, and if you read the ratio upside down you will buy when you meant to sell. FX conventions exist so that two people on a phone line never have to check.

The mental model is a price tag. In a shop, the tag says how many pounds one loaf costs; nobody writes it as loaves per pound. An FX quote does exactly the same thing: it puts a price tag on one currency, written in units of another.

Base and quote

The first currency named is the base. The second is the quote currency (also called the terms or counter currency). The base is always the thing being traded; its amount is what you specify. "I buy 5 million EURUSD" means five million euros, not five million dollars.

Which currency goes first is not a choice. The market runs a fixed seniority order, roughly

EUR › GBP › AUD › NZD › USD › CAD › CHF › JPY

and the more senior currency is the base. So it is always EURUSD and never USDEUR, always USDJPY and never JPYUSD. Pairs where the dollar is the base (USDJPY, USDCHF, USDCAD) are casually said to be quoted "the American way round" or in European terms; pairs where the dollar is the quote (EURUSD, GBPUSD) are in American terms. Any pair without USD on either side is a cross.

Reading the whole quote

1.0850 / 1.0852 bid ask you sell EUR you buy EUR handle 1.08 · last 2 digits are pips · spread = 2 pips

Two more pieces of shorthand. The big figure (or handle) is the leading part of the price, 1.08 here, which traders drop in conversation because it rarely moves — "fifty bid at fifty-two" is a complete quote to anyone who knows the handle. A pip is the last quoted digit, conventionally the fourth decimal place, so 0.0001. Japanese yen pairs are the standing exception: with a price near 151, the fourth decimal would be absurd, so yen pips are the second decimal, 0.01. Electronic venues often show one extra digit, a tenth of a pip, called a pipette.

Worked example: a five-million euro trade

You are shown EURUSD 1.0850 / 1.0852 and you buy 5 million.

1. Which side? Buying the base means paying the ask, 1.0852.
2. What you pay. $5{,}000{,}000 \times 1.0852 = 5{,}426{,}000$, so $5,426,000 leaves your dollar account and EUR 5,000,000 arrives.
3. What a pip is worth. $5{,}000{,}000 \times 0.0001 = 500$, so each pip is $500 to you. A rally to 1.0902 is 50 pips and $25,000.
4. What crossing the spread cost. The 2-pip spread on this size is $5{,}000{,}000 \times 0.0002 = 1{,}000$, or $1,000 — the price of immediacy, paid the instant you deal.

Worked example: yen, and building a cross

USDJPY is quoted at 151.20 and you sell USD 3,000,000. Here the dollar is the base, so selling the pair means selling dollars and receiving yen: $3{,}000{,}000 \times 151.20 = 453{,}600{,}000$ yen. A yen pip is 0.01, so your pip value is 30,000 yen, which is $30{,}000 / 151.20 \approx 198$ dollars.

Now suppose you need EURJPY, which no one quotes you directly. Chain the two you have. EURUSD is dollars per euro and USDJPY is yen per dollar, so the dollars cancel:

$$\text{EURJPY} = \text{EURUSD} \times \text{USDJPY} = 1.0852 \times 151.20 = 164.08$$

In words: a euro buys 1.0852 dollars, and each of those dollars buys 151.20 yen, so a euro buys 164.08 yen. Watch the units and the arithmetic tells you whether to multiply or divide; guessing gets it wrong half the time. If a directly quoted EURJPY ever drifts away from this number, that gap is Triangular Arbitrage.

Key terms

• Base currency — the first currency in the pair, the one being bought or sold and the one you size in.
• Quote (terms) currency — the second, the units the price is expressed in.
• Bid / ask — the maker's buying and selling prices, both for the base currency.
• Big figure (handle) — the leading digits, usually omitted in conversation.
• Pip — the last quoted digit, 0.0001 for most pairs, 0.01 for yen pairs.
• Cross — a pair with no US dollar in it, usually derived from two dollar pairs.