Reciprocal Currency
What Is a Reciprocal Currency?
In the foreign exchange (forex) market, a reciprocal currency depicts a situation where a currency pair includes the U.S. dollar (USD), however the USD isn't the base currency; all things considered, it is the quote currency (otherwise called the counter currency).
A reciprocal currency is in this way quoted in terms of U.S. dollars per unit of foreign currency rather than units of currency per dollar. A common model would be the EUR/USD currency pairs, where a quote of 1.20 would mean that one euro buys $1.20 U.S. dollars.
Figuring out Reciprocal Currencies
The majority of USD currency pairs feature the U.S. dollar as the base currency, which shows up first in a FX quote. For instance, the USD/JPY (dollar versus the Japanese yen) or the USD/CAD (dollar versus the Canadian dollar).
In such a quote, it would let you know the number of units of a foreign currency one U.S. dollar could buy. For example, if the quote for Israeli Shekels (USD/ILS) is 3.25, one dollar buys 3.25 shekels.
In any case, reciprocal currencies are rather quoted in what's commonly alluded to as "European" terms, meaning the currency other than the U.S. dollar is the base currency.
"Reciprocal currency" in this way depicts currency pairs utilized in the foreign exchange market where the U.S. dollar (USD) and another currency are paired, however the USD isn't the primary currency quoted.
A direct quote is a currency pair quote where the foreign currency is communicated in per-unit terms of the domestic currency. For U.S. people or firms, a reciprocal currency would be a direct quote convention. A indirect quote would on the other hand show up as the contrary articulation.
Major currency pairs that include the USD, yet where the USD isn't the base currency, incorporate EUR/USD (euro to U.S. dollar); GBP/USD (British pound to U.S. dollar); and AUD/USD (Australian dollar to U.S. dollar).
Illustration of Reciprocal Currency
An illustration of a reciprocal currency would be the quotes for the NZD/USD. This currency pair has the New Zealand dollar as its base currency and the U.S. dollar as its quote currency.
All in all, one would quote the exchange rate of NZD/USD as the New Zealand dollar versus the U.S. dollar. So if the NZD/USD quote is 0.70, it means that you can exchange one NZD for seventy pennies, U.S.
The highest traded currencies in the world are the U.S. dollar, euro, Japanese yen, pound sterling, and Australian dollar.
The EUR/USD exchange rate is likewise communicated in dollar terms, even however the euro is listed as the base currency. For instance, the EUR/USD rate may be $1.15 to 1 euro, yet while citing the rate, a trader would agree that the euro/U.S. rate is $1.15.
The Bottom Line
A reciprocal currency in foreign exchange trading is a currency pair where the USD isn't the base currency yet rather the counter currency. It is quoted in terms of U.S. dollars per unit of foreign currency. Reciprocal currencies are a large part of FX trading globally, with common reciprocal currencies being EUR/USD, GBP/USD, and AUD/USD.
Features
- A reciprocal currency is a currency pair that includes the U.S. dollar (USD) without the USD filling in as the base currency.
- USD/JPY and USD/CAD are models where the U.S. dollar is the base currency.
- Exchange rates can be inverted by separating 1 by the current exchange rate.
- NZD/USD and EUR/USD are instances of reciprocal currency pairs as the USD isn't the base currency in these pairs.
- This quote documentation is more uncommon than when the USD fills in as the base currency and is once in a while called a "European" quotation.
FAQ
What Is a Reciprocal Currency Arrangement?
A reciprocal currency arrangement is an agreement between two nations to keep a specific money supply of one another's currencies. This further develops liquidity between the nations and in the global financial markets, considers more efficient financial transactions, keeps up with reserve requirements, and sets exchange rates. Reciprocal currency arrangements are otherwise called swap lines.
How Do You Find the Reciprocal Exchange Rate?
A reciprocal exchange rate would be the inverse of the exchange rate. You would isolate 1 by the current exchange rate of the two currencies for the inverse relationship. So for instance, if the USD/EUR exchange rate was 0.89, to find the reciprocal exchange rate of EUR/USD, you would perform the accompanying calculation: 1/0.89 to show up at 1.12.
What Are the Two Ways to Quote a Currency?
Currencies can be quoted as direct quotations or indirect quotations. A direct quotation is the point at which one unit of a foreign currency is quoted in the relating units of the domestic currency. An indirect quotation is the point at which one unit of a domestic currency is quoted in terms of the equivalent foreign currency.
What Is a Currency Pair?
A currency pair quotes the value of two currencies with the value of one currency being quoted against the value of the other. The main currency in the pair is the base currency and the second listed currency is the quoted currency. Currency pairs uncover the amount of the quote currency is expected to buy one unit of the base currency.
How Are Foreign Currency Options Quoted?
Foreign exchange options are priced as the intrinsic value + the time value. This is the FX option premium. The intrinsic value is the difference between the changed over currencies using the strike rate and forward rate.
