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Currency Basket definition and quiz

Much like an index for the stock market, this forex benchmark serves the same purpose, a tool for relative performance measurement.
  1. Define - Define the term Currency Basket.
  2. Context - Use Currency Basket in a sentence.
  3. Quiz - Test yourself.
by Paul Alan Davis, CFA
Updated: July 19, 2020
Because there are 50+ currency pairs, like GBP/JPY, USD/CAD, the basket concept simplifies forex benchmarking. Learn more below.

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Currency Basket for Forex Benchmarking

Intermediate

Currency Basket is a financial benchmarking tool used to measure the forex trading performance of one currency against a group of other currencies over differing periods of time. Other currencies are held as percent weights of sometimes 6 to 20 other currencies. These weights may be based on a country's GDP or on an equal-weight basis, but are often customized to the user's needs. Besides performance measurement Currency Baskets are used in risk-management and trading applications.

Synonyms: currency index, forex benchmark

For context, the U.S. Dollar Index®, developed by Intercontinental Exchange, Inc., is one of a number of Currency Baskets. It measures the performance of the USD currency against a basket of several of its largest trading partners; specifically, British Pound, Canadian Dollar, EU Euro, Swedish Krona and Swiss Franc. Weights for this version range from 3% to 58% and, like others, prices can be found using a ticker (USDX) on exchanges and pricing services.

The International Monetary Fund (IMF) utilizes currency baskets for units of account for member countries in forex instruments called Special Drawing Rights, or IMF SDR.


In a Sentence

Liz:  Did you see how well the USD held up against the Swiss Franc this quarter? Our clients will love us.
Eve:  Yeah, but the dollar lost 7% against our currency basket.

Video

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Video Script

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Quiz

Click box for answer.

A JPY currency basket comprised of three currencies (USD, EUR, GBP) allows you to make one comparision instead of three. | True or False?

True. This basket incorporates USD/JPY, EUR/JPY and GBP/JPY pairs.

Is the exchange of goods and services in units of the currency basket a common practice? | Yes or No?

No. While risk can be hedged with a currency basket, foreign exchange markets trade in sovereign government currency pairs.

Questions or Comments?

Still unclear on currency basket? Try out the course Quant 101.

Related Terms

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