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From: Chris Tham

Subj: Currency Two-way Pricing
Date: 25 Nov 91

HP-48SX Foreign Currency Bid/Offer Pricing/Conversions
Copyright (C) 1991 Chris Tham

Introduction
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The HP-48SX FX Application performs bid/offer quotations, pricing, and
cross currency rate calculations for use by professional Foreign
Exchange market makers. It allows the user to define a set of
currencies and set two-way prices (quotes) for each currency against
the reference currency (the US Dollar denoted by the three character
code `USD'). Both direct and indirect methods of quoting currencies
are supported by the application. Each currency can then be priced on
both the bid and offer sides against any other currency defined and the
application will automatically perform the necessary cross rate
calculation, taking the appropriate side of the two-way quotes.

Background
----------

Foreign Exchange currency conversions/pricing are different from
scientific unit conversions normally performed by the HP-48SX Units
Application because there are two, instead of one, conversion factors
associated with each currency.

In the foreign exchange market, dealers buy and sell one currency in
exchange for another currency. Basically, the price or value of money
in one country is traded against money in another country. A foreign

AUD/USD 0. the Great Britain Pound Sterling `GBP' and so on). The exchange rate between any two currencies is normally quoted as the number of terms currency units required to purchase or sell one base currency unit. For example. and receiving USD 0. In the above example. hence AUD/USD 0. The exchange rate is expressed by the commodity currency code.7800.000. one counterparty may purchase 1 million AUD (value is Australian Dollars $1.7800 (or. In foreign exchange trading. Currency names are abbreviated using standard codes developed for computer input (the United States Dollar is designated by `USD'. The transaction can also be viewed as the counterparty exchanging USD for AUD. the commodity currency is usually the focus of trading and dealers buy . the Japanese Yen `JPY'. the German Deutschmark `DEM'. the Australian Dollar `AUD'. paying USD 0.7800).000) against the US Dollar at an exchange rate of AUD 1 = USD 0. exchanging AUD for USD. in standard market quotation. followed by the terms currency code and then the exchange rate in terms currency units. the exchange rate is quoted with AUD being the base currency and USD being the terms currency.7800 for every AUD 1 received.exchange transaction always involve two currencies. The exchange rate is the price at which one currency can be exchange for another.000 US Dollars for the Australian Dollars bought. This means that the counterparty has to pay (or sell) $780. one of which can be considered the currency bought or sold (the `base' or `commodity' currency) and the other currency can be considered the measure of value for effecting the transaction (the `terms' currency).7800 for every AUD 1 sold. All transactions require two counterparties. each of which will both buy and sell currency. followed by a slash. The other counterparty is performing the reverse action.

however. Most currencies are quoted against the US Dollar with the US Dollar as the base (or commodity) currency. The difference between the offer and bid quotes. i.0005 or . Instead of quoting each currency against every other currency. each dealer is free to set the exchange rate for the currency that the dealer is prepared to trade.6293 (USD is now the terms currency and appears on the right hand side of the slash). USD 0.7805.7800 and the offer rate is 0. dealers set two exchange rates.8200 (note USD is the base currency and appears on the left hand side of the slash).7800 and sell AUD for USD 0. Some currencies. This is called two-way pricing or quotation. This is also called direct quotation. are quoted with the US Dollar as the terms currency. Hence. An example of an indirect quotation is GBP/USD 1. notably those belonging to the so called `Commonwealth' countries including Great Britain and Australia. The exchange rate between any two currency can then be determined by referencing against the exchange rate for each currency against the US Dollar. i. There is no `standard' or `reference' exchange rate for any country against the US Dollar (except when countries fix currency exchange rates with respect to other currencies). a rate in which they are prepared to buy the commodity currency (the bid rate) and a rate in which they are prepared to sell the commodity currency (the offer rate).7805. By convention. An example of a direct quotation is USD/DEM 1. the dealer is prepared to buy AUD for USD 0.7800/05. This means that the bid rate for AUD/USD is 0. all currencies are normally quoted against the US Dollar. the bid rate is quoted before the offer rate. a typical two-way quote for AUD would be AUD/USD 0.and sell multiples of the commodity currency.e. By convention. Instead. This method of quoting is referred to as indirect quoting.e.