In this article, we cover direct and indirect quotes in foreign exchange transactions. We may use foreign exchange markets for various reasons it could be for online trading, business, etc.
If a U.S. company intends to purchase goods and services from another company based in Germany. The U.S. company would have to buy Euros. On the other hand, if instead of purchasing the goods and services it sells them a business based in Germany. Then, the U.S. company would receive Euros, which later have to be converted to Dollars.
You would see the exchange rate quoted as USD/EUR or EUR/USD in this case.
Direct and Indirect quotes in foreign exchange transactions
Quotes are provided to buy a currency in exchange for another currency. So, if you see a quote: USD/EUR = 0.92. Then that means, to buy 1 EUR we need to pay 0.92 USD. On the other hand, if it’s EUR/USD = 1.08. Then, we have to pay 1.08 EUR for 1 USD.
Direct Quote: When the units of home currency (i.e. USD in this case) needed to buy foreign currency is quoted, it is considered a Direct quote. For instance, USD/EUR.
Indirect Quote: When the units of foreign currency (i.e. EUR in this case) required to buy home currency is quoted, it is considered an Indirect quote. For instance, EUR/USD.
It is worth mentioning here that, when we choose to buy and sell currency at the current market rate, then that rate is called as spot rate. Such a contract can take two business days for delivery/payment.
Then, there are forward markets that are to be settled on a specific date in the future.
In conclusion, it is important to understand direct and indirect quotes before initiating a currency transaction.
Important: This material is provided only for information purposes only. It doesn’t constitute investment advice. We shouldn’t be held liable for the investment decisions readers take. We encourage readers to act at their discretion.
