- Global Frameworks: CFA Level 1 (Economics / Fixed Income), Technical FX Trading Standards.
1. FX Market Conventions and Quotation Formats
The foreign exchange market is the largest, most liquid financial network in the world, operating primarily as an over-the-counter (OTC) interbank dealer market.
Currencies are always quoted in pairs, tracking how many units of the Price Currency are needed to purchase one unit of the Base Currency:
Quotation format:
Price Currency / Base Currency (or) Base / Price
Direct quote:
Expressing a foreign currency price in terms of the base currency.
- Direct Quote: Expressing a foreign currency in terms of the domestic currency (e.g., from a US perspective, $1.15 per €1, written as USD/EUR).
- Indirect Quote: Expressing the domestic currency in terms of a foreign currency (e.g., from a US perspective, €0.87 per $1, written as EUR/USD).
2. Bid-Ask Spread and Cross-Rate Calculations
- The Dealer Spread Matrix: Market makers buy at the Bid price and sell at the higher Ask price:
Bid-Ask Spread % = [(Ask Price − Bid Price) / Ask Price] × 100 - Cross-Rate Matrix Mechanics: When calculating the exchange rate between two non-primary currencies, analysts derive the rate using their shared pricing relative to a benchmark currency (typically the USD):
(Currency A / Currency B) = (Currency A / USD) × (USD / Currency B)
3. Forward Market Pricing and Points Presentation
Forward exchange contracts lock in an exchange rate today for a transaction that will occur on a specific future date. Market makers quote forward rates using Forward Points (or pips) added to or subtracted from the prevailing spot rate:
Forward Rate = Spot Rate + (Forward Points / Scaling Factor, e.g., 10,000)
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