Overview of Currency Markets

It is also known as ‘Foreign Currency Quotation’ or ‘Indirect Quotation’ or simply ‘Currency Quotation’. Thus, under indirect method the change in exchange rate is shown by changing the number of units of foreign currency and keeping the home currency as constant. Under this method, the foreign exchange rate of a foreign currency is expressed as number of units of home currency (Local, domestic currency). There is much to learn for the new forex trader before they invest their hard-earned money in this highly liquid but highly dynamic market.

In simplicity, it can then be said that a direct quotation is an offer in which the domestic currency is kept as the base (primary) currency when being sold. When it comes to purchasing, this currency switches its place and is kept as a bid (secondary) currency. As a USD-domiciled Direct quote currency person, we multiply by the quoted rate of 1.0986, to work out our domestic currency (USD) equivalent. The euro (EUR) came into existence on Jan. 1, 1999 as the unit of account for participating European Union (EU) member nations; notes and coins were first issued on Jan. 1, 2002.

Domestic Currency vs. Foreign Currency

When it comes to trading forex via quotes, the concept of lots is also important to understand. A quantity of 100,000 units of base currency is equal to one standard lot. When stocks are exchanged using different currencies and one currency
is the official currency of the country where the exchange quote is given,
a direct exchange can be performed. When measuring the volume of your trades, you will never see direct quotes used as a unit of measurement. There is no obligation to call it a direct or indirect quote. This function affects all applications that work with exchange rates.

Jim, an investor in America, has investment holdings all over the world and is currently working on a deal in India. He wants to purchase stock valued at 15,000 Indian rupees, so he has to know the foreign exchange rate in terms of the Indian currency to price out a new investment. The abbreviation for the base currency goes directly before the abbreviation for the term currency. https://investmentsanalysis.info/ To use the same example, to write a direct quote for the exchange rate in the United States for France, one would write that the EURUSD is 0.5. Whether writing a direct or an indirect quote, the base currency comes first and the term currency comes second. Indirect exchange rates are always given with the local currency or reference currency as the to-currency.

What is an Indirect Quote?

In other words, a direct currency quote asks what amount of domestic currency is needed to buy one unit of the foreign currency most commonly the U.S. dollar (USD) in forex markets. In a direct quote, the foreign currency is the base currency, while the domestic currency is the counter currency or quote currency. In other words, a direct currency quote asks what amount of domestic currency is needed to buy one unit of the foreign currency—most commonly the U.S. dollar (USD) in forex markets. The use of direct quotes versus indirect quotes depends on the location of the trader asking for the quote, as that determines which currency in the pair is domestic and which is foreign. Non-business publications and other media usually quote foreign exchange rates in direct terms for the ease of consumers.

An example of a direct quote using U.S. dollars might be stating $1.17 Canadian per U.S. dollar, rather than 85.5 U.S. cents per Canadian dollar, which would be the indirect quote. The exchange rates will tell you how much Korean Won or American Dollars you can buy with your 100RMB. Or conversely (coming home) how much RMB you can buy with the leftover Korean Won or American Dollars. It is to be noted that the US Dollar, being the most traded currency in the world, is mostly considered as the base currency in a maximum number of pairs.

🔓 Open Banking

An individual looking to sell will receive the bid price while one looking to buy will pay the ask price. Note, like stock, currencies are traded with a bid/ask spread. Throughout this presentation we’ll ignore the spread for simplicity. However, this concept cannot be extended to general exchange rate types. Suppose our global friend visits the National Museum of Korea and is interested in purchasing a beautiful vase from the gift shop.

Indirect quotation has not been required until now, because direct quotation was usually used for exchange rates. With the start of the dual currency phase of the European Monetary Union (EMU), indirect quotation is now used within Europe for exchange rates with the euro. Indirect quotation is also becoming more widely accepted internationally.

What is a direct quote?

A lower forex rate in a direct quote implies that the value of the domestic currency is appreciating. Conversely, a lower forex rate in an indirect quote implies that the value of the domestic currency is depreciating, i.e., it is worth a decreased amount of foreign currency than before. Direct quotes are usually easier for consumers to understand because it essentially tells them how much of their currency is needed to purchase one unit of the foreign countries currency.