CFA, Finance, FRM

Currency Quote – What is Direct & Indirect Quote?

How to read a Currency Quote?

When a currency is quoted it is always quoted in terms of some other currency. So if you are trying to determine the exchange rate between the US Dollar and Euro then it might look something like EUR/USD 1.11.

In this currency pairing, the currency on the left side is called as Base Currency and currency to the right is called the Quoted Currency. The base currency is always equal to one unit (in this case, 1Euro), and the quoted currency (in this case, the US Dollar) is what that one base unit is equivalent to in the other currency.

Direct Currency Quote vs. Indirect Currency Quote

There are two ways to quote a currency pair, either directly or indirectly.

A direct currency quote is simply a currency pair in which the domestic currency is the quoted currency and foreign Currency is base currency; while an indirect quote, is a currency pair where the domestic currency is the base currency and foreign currency is quoted currency.

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For example, if Canada is the domestic currency, a direct quote would be 1.18 USD/CAD and means that USD$1 will purchase C$1.18. The indirect quote for this would be the inverse (1/1.18), 0.85 CAD/USD, which means with C$1, you can purchase US$0.85.

How are Currency quoted in the market by the Dealer

If you want to buy this currency pair, this means you intend to buy the base currency, and looking at the Ask price dealer will ask for 1.4746 USD for 1 Euro.

If you want to sell this currency pair, this means you intend to sell the base currency, and looking at the Bid price dealer will sell 1 Euro for 1.4745 USD.

Spreads and Pips

The difference between the bid price and the ask price is called a spread. If you look at the above quote EUR/USD – 1.4745/46 then the spread is the 0.0001 or 1 pips also known as points.

The pip is the smallest amount a price can move in any currency quote. In the case of the U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places. So, in a forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to 150 pips a day.

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