(MENAFN- Daily Forex) What Is a Direct Quote in the Context of Currencies?

A direct quotation is one of two methods to express a currency exchange rate in the Forex market. The other method is an indirect quotation. A direct quotation shows how many foreign currency units are necessary to buy or sell one domestic currency unit.

Here is an example:

• A US consumer requires Swiss Francs
• The USD/CHF = 0.8559
• The inverse quotation is CHF/USD = 1.1684
• The USD is the domestic currency
• The Swiss Franc is the foreign currency
• Therefore, a US consumer requires $1.1684 to buy CHF1.0000
• The USD/CHF quotation concludes that a US consumer can exchange CHF0.8559 for $1.0000

Please note:

• In Forex trading , each currency quotation has a bid price and an ask price
• Buying a currency pair occurs at the ask price, selling at the bid price
• The ask price is always higher than the bid price , which reflects the spread or the earnings of the broker, bank, or other currency exchange entity
• In a commission-free transaction, the bid and ask prices always differ
• In a commission-based transaction, the bid and ask prices could be but do not have to be, equal, as a fixed commission applies per lot size. Therefore, a fee-free currency exchange is impossible

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A currency hierarchy exists in the Forex market for currency quotations. They are straightforward, and the simplicity of getting an indirect quote from a direct quote ensures that traders can swiftly get the relevant information for the currency pair quotation.

Here is the Forex market currency hierarchy:

• The EUR is always the base currency, the first currency of a quote
• The GBP is always the base currency, except against the EUR
• The USD is always the base currency in USD quotes, except against the EUR and the GBP, where it is the quote currency, the second currency of a quote
• Currency quotes that do not include the USD are cross-currencies
• 88% of all Forex transactions involve the USD

Direct Quotation Formula

The formula for a direct quotation always considers the home currency of the individual or entity requesting a quote. There are cases where a direct quote may not exist in the Forex market, although an indirect quote conversion exists.

Here is the direct quotation formula:

Amount of domestic currency (variable) / Amount of foreign currency (fixed)

EUR (base currency) / USD (quote currency) = 1.1000 or

An individual or entity in the Eurozone will receive $1.1000

An indirect quote is the inverse of a direct quotation:

Indirect quote = 1 / direct quote or

A fixed domestic currency value / a variable foreign currency value

Therefore (using our 1.1000 EUR/USD quote):

USD/EUR = 1 / 1.1000 or 0.9091 or

An individual or entity in the Eurozone requires €0.9091 to receive $1.0000

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The difference between a direct quotation and an indirect one is straightforward, and the most essential fact to remember is that a direct quotation always depends on the home currency and the transaction location of the individual or entity requesting a quote.

Here is the difference between a direct quotation and an indirect quotation:

• A direct quotation reveals how many domestic currency units are necessary to exchange for one foreign currency unit
• An indirect quotation shows how many foreign currency units are necessary to exchange for one domestic currency unit

Here is an example:

• A US individual is taking a trip to Spain and wants to exchange $3,000 for Euros
• The EUR/USD quote is 1.1000, which is an indirect quote for the US-based traveler
• The direct quote is 0.9091
• Therefore, the $3000 is worth €2,727 (rounded up to the nearest Euro)
• Once back home, the US traveler has €700 left and wants to exchange them back into US Dollars
• The EUR/USD quote is 1.1125
• Therefore, the €700 is worth $779 (rounded up to the nearest US Dollar)

Please note:

• Assume the US traveler did not spend any cash and exchange the €2,727 back to US Dollars
• The EUR/USD quote is 1.1125
• Therefore, the €2,727 is worth $3,034 (rounded up to the nearest US Dollar), as the Euro strengthened against the US Dollar

What Are the Implications of a Direct Quotation?

A lower Forex quote in a direct quotation means the domestic currency strengthens, increasing its spending power. A lower Forex quote in an indirect quotation shows a weakening domestic currency.

Therefore, a trader will receive more foreign currency if the direct quotation shows a lower exchange rate Quotation Conclusion

A direct quotation tells a person or entity how many foreign currency units are necessary to buy or sell one domestic currency unit. They are essential for the global economy and the financial system, and a Forex quotation hierarchy exists, meaning indirect quotations to direct quotations conversions are necessary

What is an example of a direct quotation?

Since a direct quote reveals how many domestic currency units are necessary to buy one foreign currency unit, one example of a direct quotation for a US consumer or entity would be USD/EUR = 0.9088. Please note that there is no USD/EUR quote in the Forex market, as it is always EUR/USD amid hierarchy rules. Therefore, traders would use an indirect quote to receive a direct quotation.

What is an indirect quote in finance?

An indirect quote in finance is a currency quotation that shows how many foreign currency units are necessary to buy or sell one domestic currency unit. For example, a US consumer or entity that makes a transaction in the UK using British Pounds would look at the GBP/USD direct quotation, where the US Dollar is the foreign currency, as the transaction occurs in the UK and the British Pound is the domestic currency. Therefore, if the GBP/USD = 1.2700, it would take $1.2700 to buy £1.00.

What is an example of a direct quotation currency?

Examples of a direct quotation currency are the EUR/USD for Eurozone consumers, or the USD/CHF for US consumers.

DailyForex Team The DailyForex team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

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