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Given n elements, which are all traded against each other, is it possible to assign a single value to each one that reflects how much it's worth compared to all other elements?

i.e.: the Forex market, each currency is traded against each other, but their prices are only relative to one other currency. What I would like to know is how can I assign a single value to an element that captures its relationship to every element it's traded against. Then I would be able to say that 1 USD is worth 10 and 1 EUR is worth 8.

I hope I expressed myself clearly enough.

Douglas
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1 Answers1

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There are several ways of making such a comparison. The most traditional method is, to compare the value of currencies to the price of gold. Namely, the currencies that are on the gold standard would be the most stable currencies.

However, with the fluidity of the market now, even the price of gold is not stable. For a more objective measure, you would do a sort of Dow index: you would assign weights to the most frequently traded currencies, and the "objective" value of the currency would be how much of the weighted currencies you can buy with it.

For example, if you assign the weight 3 to dollars, 5 to euros, 2 to pounds, and you can buy 30 dollars, 50 euros, and 20 pounds for 100 dollar, then the "value" of the dollar is 10. If you can buy 36 dollars, 60 euros, and 24 pounds for 100 euros, then the "value" of the euro is 12.

I hope I've explained myself clearly enough.

Alex
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