With rapidly evolving technology and e-commerce taking over the world, all businesses operate much higher than before. Most companies are working with international suppliers and customers. Their products and services are marketed to an audience belonging to different regions. Most e-commerce businesses aim to take advantage of these opportunities, and for that, their business model must have the capacity to conduct business internationally.
To make transactions with international clients or other businesses, companies need tools, such as exchange rate API. In foreign exchange, the currencies being handled are quoted against a set currency known as the base currency. This base currency allows for other currencies to be valued in comparison to it, making a “currency pair.” The other valued currency is called the “quote currency” or the “target currency.”
Currency trading is also at the heart of forex businesses where currencies are being sold or bought. Therefore, exchange rate API is needed for forex trading and indicates companies’ mechanisms and profit/loss margin.
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What Is a Base Currency?
A base currency calculates how much quote currency would be required to match one single unit of the base currency. For example, if we have a currency pair made of U.S. and Canadian dollars (USD/CAD), the USD is the base currency that would determine the estimate of the quoted currency.
The currency abbreviations being used for currency pairs are given by the International Organization for Standardization (ISO). All abbreviations are three letters long and represent a unique currency.
When indicating a currency pair, the two abbreviations are written with a slash in between, but the slash can be removed entirely or replaced by a period or dash. The first currency mentioned in a currency pair is the base currency. When currency pairs are traded, the base currency is bought, and the quote currency is sold.
What Are Base Currencies?
When used in e-commerce markets or trading applications, the base currency is denoted with the quote currency as XXX/YYY.
For example, a merchant in Canada has a base currency of CAD. If someone from the U.S. orders products from the merchant, the currency pair will evaluate how much USD is required according to the current exchange rate. For example, reading CAD/USD = 0.55 means that 1 is equal to $0.55. This means that to purchase 1 base currency worth of product, the buyer needs to pay $0.55. Major base currencies worldwide include USD for the U.S. dollar, EUR for the euro, JPY for the Japanese yen, GBP for the British pound, AUD for the Australian dollar, CAD for the Canadian dollar, and CHF for the Swiss franc.
Why Do We Need Base Currency?
Base currencies are needed to determine the value of international purchases for business and, beyond that, in forex trading. These foreign exchange trades are conducted on a simultaneous mechanism where one currency is bought while the other is sold.
Currency pairs work as a single unit. The base currency is bought in each transaction, and the quote currency is sold. Conversely, selling a currency pair means the quote currency is being sold, and the base currency is being bought.
The quote currency is always in comparison with the base currency. So, setting a base currency becomes imperative to the whole trading process in the foreign exchange process and any purchases or accounting decisions being made by a company.
How to Use a Base Currency?
Using base currency in forex trading also depends on the interest rates in the market and how different economic mechanisms are impacting individual currencies that can determine which ones would be used as the base currency.
The base currency is longed or bought in a forex currency pair, and the quote currency is shorted or sold. In addition, there are incremental units associated with currency pairs called “pips.” Every pip is the fourth digit after the decimal point in a given quotation and equals .01% of 1 currency unit.
Setting the base currency for your e-commerce business can depend largely on your location and the legal business setup. The exchange rates and the interest market determine your base currency in forex trading.
The trades are made in terms of lots. One lot is 100,000 units of the base currency. The margins depend on the market value and can even be as low as 2%. At that rate, if you are trading one lot with USD as your base currency, you can control $100,000 in the trade with $2,000 in your trading account.
What About Enterprise Usage of Base Currency?
Businesses need a base currency to determine their profit and loss. This base currency is used as their accounting currency and is calculated and used for all business estimates and valuations.
The constantly moving exchange market needs to have an anchor in forex trading. The investors base their purchases and sales on the base currency value using the exchange rate API. If an investor thinks the base currency is going up, they purchase it, and currency pairs are sold if the base currency seems to depreciate.
If you are ready to incorporate your base currency for your business and online shops and ensures a compelling user experience for your customers, then you can try fixer, one of the most innovative exchange rate API in the e-commerce market and forex trading today!
Also, having access to exchange rate API, you can also try our other API via API Marketplace and use the functionality for your own business.