Indirect Quotation. Meaning: This method is the opposite of the direct quotation method. Under this method, the quote is expressed in terms of foreign currency. Example: An example of indirect quotation would be: EUR/USD: / Usage: The usage of indirect currency quotation is extremely rare.
Table of contents
- Exchange Rates | Boundless Economics
- Full comparison of Forex direct quote vs Indirect Quote
- Types of Quotations in Forex Market
- Exchange Rate Regimes
- Reader Interactions
Save my name, email, and website in this browser for the next time I comment. This site uses Akismet to reduce spam. Learn how your comment data is processed. Skip to primary navigation Skip to main content Skip to primary sidebar Skip to footer. This lesson is part 5 of 11 in the course The Foreign Exchange Market. Posts You May Like. Leave a Reply Cancel reply Your email address will not be published. For this reason, all currencies exchanged in the forex market transact in pairs that are commonly known among forex traders as currency pairs. The following sections introduce some of the basic concepts associated with currency pairs, including their notation convention and the significance of the order the currencies appear in.
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Market liquidity and popular nomenclature topics are also discussed below, and lists of the major, minor and exotic currency pairs and crosses are provided. Furthermore, each currency pair consists of a base currency that appears before the slash and a counter currency or quote currency that appears after the slash in the common market shorthand. Dollar or USD is the counter currency in the pair that is being quoted relative to the base currency. The prevailing forex market quotation convention gives precedence to certain currencies over others that affects whether they are usually quoted as the base currency or the counter currency in a currency pair.
Furthermore, most minor currencies are quoted as the counter currency in currency pairs with U. Dollars acting as the base currency.
Exchange Rates | Boundless Economics
Dollar Swedish Krona exchange rate. Before making a foreign exchange transaction, a trader must first obtain a quotation from a market maker. They would typically do this by communicating the desired currency pair and the amount of one of the currencies to be exchanged to their counterparty. Retail forex traders will typically have an online forex broker as their counterparty for the transaction and may use an electronic trading platform such as Metatrader to obtain the quotation they require. In contrast, professional Interbank traders will typically deal directly with other professional forex market counterparties at banks and other financial institutions.
The quotation received will generally be expressed as the number of base currency units required to purchase one unit of the counter currency. For example, an exchange rate quotation of 1. Hence, 10 million Euros could be exchanged for Dollars at that exchange rate. This way, the Japanese firm is clear about the amount to pay and protects itself from a sudden depreciation of the yen. If the yen depreciates, more yen will be required to purchase the same euros, making the deal more expensive. By hedging, the company locks in the rate. Arbitrage is the simultaneous and instantaneous purchase and sale of a currency for a profit.
Advances in technology have enabled trading systems to capture slight differences in price and execute a transaction, all within seconds. Previously, arbitrage was conducted by a trader sitting in one city, such as New York, monitoring currency prices on the Bloomberg terminal. Noticing that the value of a euro is cheaper in Hong Kong than in New York, the trader could then buy euros in Hong Kong and sell them in New York for a profit. Today, such transactions are almost all handled by sophisticated computer programs.
The programs constantly search different exchanges, identify potential differences, and execute transactions, all within seconds. Speculation refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit. Such changes could happen instantly or over a period of time. High-risk, speculative investments by nonfinance companies are less common these days than the current news would indicate. While companies can engage in all four uses discussed in this section, many companies have determined over the years that arbitrage and speculation are too risky and not in alignment with their core strategies.
In essence, these companies have determined that a loss due to high-risk or speculative investments would be embarrassing and inappropriate for their companies. In general, when we quote currencies, we are indicating how much of one currency it takes to buy another currency. This quote requires two components: the base currency The currency that is to be purchased with another currency and is noted in the denominator. The quoted currency is the currency with which another currency is to be purchased.
Full comparison of Forex direct quote vs Indirect Quote
In an exchange rate quote, the quoted currency is typically the numerator. The base currency is the currency that is to be purchased with another currency, and it is noted in the denominator. Note that 8 reflects the general exchange rate average in this example. In this case, the Hong Kong dollar is the quoted currency and is noted in the numerator.
The US dollar is the base currency and is noted in the denominator. If you want to sell 1 US dollar, you can buy 8 Hong Kong dollars, using the example in this paragraph. Additionally, there are two methods—the American terms Also known as US terms, American terms are from the point of view of someone in the United States. In this approach, foreign exchange rates are expressed in terms of how many US dollars can be exchanged for one unit of another currency the non-US currency is the base currency.
These two methods, which are also known as direct and indirect quotes, are opposite based on each reference point. The American terms, also known as US terms, are from the point of view of someone in the United States. If you think about this logically, a business that needs to buy a foreign currency needs to know how many US dollars must be sold in order to buy one unit of the foreign currency.
In a direct quote, the domestic currency is a variable amount and the foreign currency is fixed at one unit. Conversely, the European terms are the other approach for quoting rates. In this approach, foreign exchange rates are expressed in terms of how many currency units can be exchanged for a US dollar the US dollar is the base currency.
While this is a direct quote for someone in Europe, it is an indirect quote States the price of the domestic currency in foreign currency terms. An indirect quote states the price of the domestic currency in foreign currency terms.
In an indirect quote, the foreign currency is a variable amount and the domestic currency is fixed at one unit. A direct and an indirect quote are simply reverse quotes of each other. If you have either one, you can easily calculate the other using this simple formula:.
This can be read as.
Types of Quotations in Forex Market
While you are performing the calculations, it is important to keep track of which currency is in the numerator and which is in the denominator, or you might end up stating the quote backward. The direct quote is the rate at which you buy a currency. Tip: Many international business professionals become experienced over their careers and are able to correct themselves in the event of a mix-up between currencies.
To illustrate using the example mentioned previously, the seasoned global professional knows that the British pound is historically higher in value than the US dollar.
Exchange Rate Regimes
This means that it takes more US dollars to buy a pound than the other way around. Using this logic, we can then deduce that 1. As an international businessperson, we would know instinctively that it cannot be less—that is, only 0. This would imply that the dollar value was higher in value. As a result, this self-test is a good way to use logic to keep track of tricky exchange rates. A useful side note: traders always list the base currency as the first currency in a currency pair.
Reader Interactions
This quote indicates that the base currency is the US dollar and 85 yen are required to purchase a dollar. This is also called a direct quote, although FX traders are more likely to call it an American rate rather than a direct rate. It can be confusing, but try to keep the logic of which currency you are selling and which you are buying clearly in your mind, and say the quote as full sentences in order to keep track of the currencies.
These days, you can easily use the Internet to access up-to-date quotes on all currencies, although the most reliable sites remain the Wall Street Journal , the Financial Times , or any website of a trustworthy financial institution. The exchange rates discussed in this chapter are spot rates—exchange rates that require immediate settlement with delivery of the traded currency.
The spot exchange rate The exchange rate transacted at a particular moment by a buyer and seller of a currency. For currency traders, the spot can change throughout the trading day, even by tiny fractions.
For currency traders though, the spot can change throughout the trading day even by tiny fractions. To illustrate, assume that you work for a clothing company in the United States and you want to buy shirts from either Malaysia or Indonesia. The shirts are exactly the same; only the price is different. For now, ignore shipping and any taxes. Assume that you are using the spot rate and are making an immediate payment.