Numeraire is a term commonly used in economics and finance to refer to a standard unit of measurement, often of value or price, which is used as a reference point or benchmark to compare and express the value of other goods, services, or assets. It serves as a medium of exchange or a unit of account.
In financial markets, a numeraire can be a currency, commodity, or any other established asset that acts as a pricing benchmark. For example, in international currency markets, the US dollar is often used as the numeraire, and exchange rates are quoted in relation to it. Similarly, in commodity markets, a specific commodity such as gold or oil may be chosen as the numeraire, and its price becomes the reference point for pricing and trading other commodities.
The concept of numeraire is also relevant in measuring and comparing the value of financial securities or portfolios. By setting a particular asset or portfolio as the numeraire, changes in the value of other assets can be expressed relative to it. This enables investors and analysts to evaluate the performance, risk, or returns of various securities or portfolios in a standardized manner.
Overall, the use of a numeraire is a valuable tool in economics and finance as it provides a common unit of measurement to facilitate comparisons, pricing, and analysis of various goods, services, assets, or investment opportunities.
