Base currency
1.
The 'base currency' in a foreign exchange rate quotation is the currency which there is one of.
Example 1: Foreign exchange rate quotation
In the quotation GBP/USD 1.4600; or 1 GBP = 1.4600 USD,
the base currency is GBP;
meaning one British pound would be exchanged for a variable number of USD, depending on the rate quoted.
The base currency is also known as the Reference currency or the Fixed currency.
Base calculation rule
A rule of thumb in applying foreign exchange rates is to consider whether the calculation is from, or to, the base currency.
When calculating:
- From the base, multiply by the exchange rate
- To the base, divide by the exchange rate
Example 2: Calculating from the base currency
We need to make an exchange of GBP 10m and USD.
Use the exchange rate GBP/USD 1.4600 to calculate the number of USD.
GBP is the base currency.
We're calculating from the base currency.
So multiply by the exchange rate:
USD amount = 10m x 1.4600
= USD 14.6m
Example 3: Calculating to the base currency
We need to make an exchange of USD 10m and GBP.
Use the exchange rate GBP/USD 1.4600 to calculate the number of GBP.
GBP is the base currency.
We're calculating to the base currency.
So divide by the exchange rate:
GBP amount = 10m / 1.4600
= GBP 6.85m
2.
More generally, a 'base currency' means the currency with which other currencies are compared.
Example 4: Multicurrency liquidity arrangement
In a multicurrency liquidity arrangement, 'base currency' refers to the currency in which the master account is denominated and to which all other currencies are converted.
The base currency also serves as the basis for all interest rate calculations in the multicurrency liquidity arrangement.
Example 5: Foreign exchange gains and losses
In calculating a foreign exchange gain or loss, a 'base' currency means the currency which is not considered to be 'foreign' currency for the purpose of calculating foreign exchange (FX) movements.
In this context, FX movements arise when an organisation enters into a transaction in a foreign currency. Gains and losses are recognised, either on an accruals basis or a realisation basis, between the value of the transaction in the ‘home’ (or base) currency at two different points in time.
