Inversion

From ACT Wiki
Revision as of 16:02, 16 March 2015 by imported>Doug Williamson (Expand explanation of base currency, for clarity.)
Jump to navigationJump to search

1.

A term used in foreign exchange rate quotation.


Example

Consider the historical FX quote:

1 GBP = USD 1.4598 - 1.4602.

The base currency is GBP.

This is the currency there is a single unit of, to be exchanged for a variable number of USD.


The inversion of this FX quote means expressing the same price, but with the other currency as the base currency (USD here):

1 USD = GBP ( 1 / 1.4602 ) - ( 1 / 1.4598 )

1 USD = GBP 0.6848 - 0.6850.


In the inverted FX quote, USD is the currency there is a single unit of (to be exchanged for a variable number of GBP).


2.

In any market, the reversal of a normal - or commonly expected - relationship.

For example the situation of an Inverse yield curve, where longer maturities of funds are trading at LOWER yields than shorter-dated maturities (being the opposite of the normally expected upward-sloping relationship).


See also