What is Base Currency?
Base currency represents the currency a company reports its accounting information; it is also called domestic currency and accounting currency. A company that engages in activities involving businesses in other countries or regularly exchanges funds into different currencies will often use the base currency for its accounting processes. The proper way companies report this type of financial information is to list the currencies as USD/EUR. USD represents U.S. Dollars and the base currency, while EUR represents the Euro and is called the quote currency.
One purpose of this designation is to define a currency pair on a foreign exchange market. Currencies are often traded on commodity exchanges so investors can take advantage of the increases and decreases in their value. An investor in one country who is looking to sell currencies will often need to list the base currency and the quote currency. Commodity exchanges have very strict regulations, as rogue investors can devalue a countries currency through buying and selling the currency on an open exchange, so this information is often required.
Another way individuals and companies can list currencies is by stating them as "currency 1" (CCY1) and "currency 2" (CCY2). This information may appear in the footnotes or disclosures of a company's financial statements and in their publicly released reports. These reports are most often linked to companies that are publicly held. Public companies will need to release this information to investors, who need it to understand the long-term viability and operations of the company.
Base currency also serves the purpose of telling an individual of business how much currency is necessary to purchase one unit of the base. For example, purchasing one unit of the U.S. Dollar currency may require 1.35 Euros. This information is necessary to ensure buyers have enough units of one currency to exchange for another. Investors are often the most frequent users of this information, as they actively buy and sell the currencies to gain investment income.
Buying currencies typically occurs when one is weaker than another. This allows the investor to purchase more currency with favorable exchange rates. Selling is the opposite of buying; investors will sell as currencies gain strength, as it will require more quote currency to purchase the base currency. Currency investing is often short-term, as movement can occur rapidly in this market.
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