by Girl Banker® When you see an exchange rate on a trading screen there will be two prices: one for buying a currency and one for selling it. ![]() Example exchange rates: GBPUSD: 1.6000 / 1.7000 (the mid-point = 1.6500) EURUSD: 1.2900 / 1.3000 (the mid-point = 1.2950) EURGBP: 0.8000 / 0.8100 (the mid-point = 0.8050) First, understand what the ‘base' is: For simplicity, I will use the mid-point of the above exchange rates to explain the base. When you see GBPUSD = 1.6500, it means £1 buys or sells $1.6500. GBP is the base. The currency that you are buying or selling “1” of is the base. If EURUSD = 1.2950, it means that €1 buys or sells $1.2950; EUR is the base. If EURGBP = 0.8050, it means that €1 buys or sells £0.8050; EUR is the base. What’s up with this notation?
In text books you will normally see USD per GBP or USD/GBP and written like this it is easy to see that GBP is the base. However, all trading screens will show this relationship as GBPUSD. You might be thinking, I could never get used to this, but trust me, you will get used to the notation in no time at all. Once you understand the base you will know whether you are on the right or the left hand side of an FX transaction: If you - as the client - are buying the base, you are on the right hand side (RHS). So, for GBPUSD: 1.6000 / 1.7000 If you - as the client - want to buy GBP and sell USD you are on the RHS so you get the price that you see on the right (the higher price), 1.7000. If you want to buy GBP100,000, you would need to pay USD170,000. If you - as the client - are selling the base, you are on the left hand side (LHS). So, for GBPUSD: 1.6000 / 1.7000 If you want to sell GBP and buy USD you are on the LHS so you get the price that you see on the left (the lower price), 1.6000. If you want to sell GBP100,000, you would receive USD160,000. So, you receive USD10,000 less when you sell GBP than when you buy GBP. The difference in price between buying and selling exists because the trader needs to make money to cover the risk involved in trading as well as to make a profit. What does the request in the picture at the top mean? “Cable” is FX markets lingo for the exchange rate between GBP and USD, GBPUSD. “10 bucks” is markets lingo for USD10 million. So, if you hear, “John, live price for 10 bucks of right-hand-side cable value next Tuesday please?” John (the trader) is being asked to provide a price to a client that is selling USD10 million and buying GBP next week Tuesday. A live price is one that the client might accept and transact on. The opposite would be an “indicative”. If a client just wants an indication, it doesn’t have to be as accurate. We’ll chat more about live prices and indications in a later blog. To become an investment banker, you will need to know a little about FX.
1 Comment
JP
3/9/2020 09:34:30 am
Finally some clear explanation what RHS and LHS means. Thanks!
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Girl Banker®I created my investment banking blog in 2012 as soon as I resigned from i-banking & published my book, To Become An Investment Banker.
Initially published at girlbanker.com, all posts were later subsumed into my personal website under katsonga.com/GirlBanker. With 7 years of front office i-banking experience from Goldman Sachs and HSBC, in both classic IBD (corporate finance) and Derivatives (DCM / FICC), the aim of GirlBanker.com was to make it as straight-forward as possible to get into a top tier investment bank. I'm also a CFA survivor having passed all three levels on the first attempt within 18 months - the shortest time possible. Categories
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