Understanding Direct Quotes in Forex: A Comprehensive Guide

A direct quote is an exchange rate quotation in the foreign exchange market. It quotes a fixed unit of a foreign currency against a variable amount of the domestic currency. In other words, a direct quote depicts the amount of foreign currency that can be bought for a certain unit of the domestic currency. The exact opposite of the direct quote is known as the indirect quote.

Summary

• A direct quote is an exchange rate quotation in the foreign exchange market. It quotes a fixed unit of a foreign currency against a variable amount of the domestic currency.
• An indirect quote is an exchange rate quotation in the foreign exchange market that quotes a variable amount of a foreign currency against a fixed unit of the domestic currency. 
• In the foreign exchange market, currencies are never exact; they are always relative. In a foreign exchange market, currencies are depicted as a ratio of one another. There is no single outstanding currency.

What is an Indirect Quote?

An indirect quote is an exchange rate quotation in the foreign exchangeForeign ExchangeForeign exchange (Forex or FX) is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of supply and demand. market that quotes a  variable amount of a foreign currency against a fixed unit of the domestic currency.

The indirect quote is also popularly referred to as a “quantity quotation.” It basically reflects the quantity of foreign currency needed to buy a certain unit of the domestic currency.

Domestic Currency vs. Foreign Currency

In the foreign exchange market, currenciesFX Rates - CurrenciesThe Table below has FX Rates for major Currencies, as compared to the USD. The USD is the most widely traded currency in the world, and is involved in over 81% of all forex trading. The USD is popularly referred to as the Greenback, due to its bill colour. are never exact; they are always relative. In a foreign exchange market, currencies are depicted as a ratio of one another. There is no single outstanding currency.

Hence, whether the currency under consideration is a domestic currency or a foreign currency depends on the locations of the parties involved.

For example, if the buyer of a currency is from France, whereas the seller of a currency is from the U.S. For the buyer, the domestic currency will be euros, and the foreign currency will be the USD. On the other hand, for the seller, the domestic currency will be the USD, while the foreign currency will be euros.

Direct Quote and Indirect Quote – Formula

The direct quote and indirect quote can be expressed in relation to each other, as follows:

Direct Quote and Indirect Quote – Example

For example, if the exchange rate between the US dollar and the Chinese yuan is 0.56 yuan per US dollar, it is a direct quote for China, as the domestic currency for China is represented per unit of the US dollar (foreign currency).

Similarly, the exact currency quote above is an indirect quote for the USA, as a USD1.79 per yuan.

Popular Forex Convention

In the foreign exchange market worldwide, USD is the most engaged in, i.e., quite easily the most heavily traded currency. Hence, by popular convention, most currencies are quoted as a variable amount of foreign currencies per US dollar, which serves as the base currency. For example, most exchanges worldwide list the US dollar as the base currency, and foreign currencies are expressed as ratios with respect to the US dollar.

Other major currencies used as the base currency around the globe include the British pound and euro.

Implications of 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.

Therefore, if the domestic currency appreciates, it implies that a smaller amount will be needed to exchange it for one unit of the foreign currency. Conversely, if the domestic currency depreciates, it implies that a higher amount will be needed to exchange it for one unit of the foreign currency.

Base Currency vs. Counter Currency

The forex market comprises two types of currencies when expressing them through a ratio.

In a direct quote, the foreign currency is the base currency, whereas the domestic currency represents the counter currency.

Conversely, in an indirect quote, the domestic currency is the base currency, whereas the foreign currency represents the counter currency.

More Resources

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