What is an Indirect Quote?
An indirect quote is a currency quote on the foreign exchange market that shows how much foreign currency is needed to buy or sell one unit of the local currency. It is called an “indirect quote.” Sometimes called a “quantity quotation,” an indirect quote tells you how much foreign currency you need to buy one unit of the local currency. There is a difference between the base currency (the home currency) and the counter currency (the foreign currency).
How to Read A Indirect Quote
An indirect quote, also called a “price quotation,” tells you how much one unit of a foreign currency costs in terms of a different number of units of the domestic currency. It is the opposite of a direct quote.
The U.S. dollar (USD) is the most crucial currency in foreign exchange markets. Because of this, direct quotes usually use the USD as the base currency and other currencies, like the Canadian dollar (CAD), Japanese yen (JPY), and Indian rupee (INR), as the counter currency. Euros and Commonwealth currencies like the Australian dollar (AUD), New Zealand dollar (NZD), and the British pound (GBP) are the only ones that don’t follow this rule. They are usually given indirectly, like GBP 1 = USD 1.30.
Let’s use the CAD as an example. Let’s say that it is worth 1.2500 U.S. dollars. If you are in Canada, this quote would be written as C$1 = US$0.8000, which is 1/1.2500. On the other hand, the usual quote in foreign exchange markets is 1.2500. This is an indirect quote from the U.S. point of view because it shows how much foreign currency (CAD) is needed to get 1 USD. On the other hand, USD 0.8000 would be a straight quote.
In an indirect quote, a lower exchange rate means that the value of the local currency is falling or weakening. Using the same example above, if the USD/CAD quote changes to US$1 = C$1.2300 (indirect quote), then the USD (the local currency) has become weaker because it takes less CAD to buy 1 USD. The direct price of 0.8130 (1/1.2300) shows that 1 CAD is worth 0.8130 USD instead of 0.8000 USD.
Crosses of money
Do you know about cross-currency rates? These show how much one currency is worth in terms of another currency. To get a reasonable price on the cross-rate, traders or buyers should determine what kind of quotation is used (direct or indirect).
For instance, if the price of USD/JPY is 100 and the price of USD/CAD is 1.2700, what is the price of CAD/JPY from both the Japanese and the Canadian points of view?
USD/JPY ÷ USD/CAD is the usual way to quote CAD/JPY.
In other words, if the local currency is CAD,
It takes 100 CAD to buy 1.2700 JPY, which is 78.74 JPY.
and
If the cash used at home is JPY,
Also, 1 JPY equals 1.2700 ÷ 100, which is 0.0127 CAD.
Conclusion
- On the foreign exchange markets is an indirect price. It tells you how much foreign currency you need to buy or sell one unit of the local currency.
- An indirect quote, which tells you how much foreign currency you need to buy. This one unit of the local currency is also called a “quantity quotation.”
- A direct quote tells you the price of one unit of a foreign currency. In terms of a varying number of units of your currency. It is the opposite of an indirect quote.
