How Do Direct Quotes Work?

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

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

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

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.

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.