Base currency
The currency being priced in an exchange rate quote: the quote gives the units of the price currency needed to buy one unit of it. Dealers' bids and offers are to buy and sell it.
Where you will meet it
Base currency appears in 11 learning outcomes on the CFA syllabus. A few of them:
- Tell real exchange rates apart from nominal ones and find the percentage move in a currency
“For percentage changes, the base currency's change is the change in the quote itself.”
- For a spot or forward currency quote, work out and explain its bid–offer spread and say what makes that spread wider or narrower
“A dealer quotes two prices for one unit of the base currency, both in the price currency: the bid, at which the dealer buys the base currency, and the offer, at which it sells.”
- Propose and defend an asset allocation that uses the global market portfolio as its reference point
“Adjust the result for client specifics: liabilities, base currency and hedging policy, liquidity needs, taxes and restrictions.”
- Illustrate how currency forwards, futures and swaps alter the risk and return of a portfolio
“Covered interest parity sets the forward price, so hedging a currency whose interest rates exceed the base currency's gives up that yield gap, while hedging a lower-yielding one earns it.”
See also
Practise it
Practise base currency until it is automatic: questions that explain every wrong option.
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