Terminology and notations

As we will work with FX rates, it is important to clarify some related terms. Generally, we will denote spot FX rates by S, which measures the price of one currency (called base currency) in terms of another currency (called variable or quote currency). In other words, one unit of the base currency is equivalent to S unit of the variable currency. It is also important to understand how to read FX market quotes. An FX quote on a currency pair is denoted by the abbreviations of the two currencies: a three-letter code for the base currency, followed by another three-letter code for the variable currency. For example, EURUSD=1.25 means that 1 euro is worth 1.25 dollars. This is equivalent to the quote USDEUR=0.8, which means that 1 dollar is worth 0.8 euros. Usually, it depends on historical market conventions that decide which currency is treated as the base currency in a given FX-pair.

In Chapter 4, Big Data – Advanced Analytics, we have already seen how to...