What is a direct quote (in foreign exchange)?
– Definition: A direct quote expresses the price of one unit of a foreign currency in terms of the domestic currency. In other words, it answers the question: “How many units of my home currency are needed to buy one unit of the foreign currency?”
– Terminology: The foreign currency named first (the one being bought) is the base currency. The domestic currency is the quote currency (also called the counter currency).
Why this matters
– If the direct quote rises, it means the domestic currency is losing value relative to the foreign currency (because you need more domestic currency to buy one unit of the foreign currency). If the direct quote falls, the domestic currency is strengthening.
Quick checklist — how to read or prepare a direct quote
1. Identify the domestic currency (your “home” currency).
2. Identify the foreign currency (the currency being priced).
3. Determine whether the quote gives domestic units per 1 unit of foreign currency. If yes, it’s a direct quote.
4. Remember market conventions: some currencies (USD, EUR, GBP) have standard base/quote conventions that traders usually follow.
5. To get the indirect quote (foreign units per 1 unit of domestic currency), take the reciprocal.
6. Check the timestamp — FX rates change throughout the day and may differ across sources.
Direct vs. indirect quote — the core difference
– Direct quote: domestic currency per 1 unit of foreign currency (example: $1.17 CAD per USD).
– Indirect quote: foreign currency per 1 unit of domestic currency (example: 0.8547 USD per CAD).
They are numeric reciprocals of each other.
Conversion formula
– If D = direct quote (domestic currency per 1 unit of foreign currency), then the indirect quote I (foreign currency per 1 unit of domestic currency) is:
I = 1 / D
– Conversely, D = 1 / I.
Worked numeric examples
1) USD/JPY example (shows weakening domestic currency):
– Suppose a Japanese resident sees a direct quote of 105 JPY per 1 USD. That means 105 yen are needed to buy one dollar.
– If the quote moves from 100 JPY/USD to 105 JPY/USD, the yen has weakened: it now costs 5 more yen to buy the same dollar.
2) USD–CAD conversion between direct and indirect quotes:
– Direct quote (in Canada): 1.17 CAD per 1 USD (CAD/USD = 1.17).
– To get the indirect quote (USD per 1 CAD): USD/CAD = 1 / 1.17 = 0.8547 USD per CAD.
– Interpretation: each Canadian dollar buys about $0.8547 USD.
Market conventions and common patterns
– The U.S. dollar (USD) is the most traded currency, and many professional markets quote other currencies in terms of units per USD (making USD the base in many trading conventions).
– The British pound (GBP) historically often appears as the priced currency (e.g., dollars per pound) because of its historical international role.
– The euro (EUR) is conventionally treated as the base currency in EUR pairs (quotes show how many dollars, pounds, Swiss francs, or yen are needed to buy €1), reflecting ECB conventions established when the euro launched.
Why traders or publications use direct quotes
– Local
investors can more easily see how much of their home currency is required to buy one unit of the foreign currency. That makes changes in local purchasing power straightforward to interpret (a rising direct quote implies the foreign currency is becoming more expensive for domestic holders). Other reasons include:
– Media and reporting simplicity — newspapers and websites aimed at a domestic audience prefer prices that show how much local cash is needed to buy one unit of a widely traded foreign currency.
– Accounting and risk management — companies hedging foreign-currency receivables/payables usually find it simpler to work in home-currency terms.
– Regulatory and tax reporting — many jurisdictions require contracts and filings to be expressed in domestic-currency values.
Turning direct quotes into indirect quotes — step-by-step
If you need the opposite format (indirect = how many units of foreign currency per one unit of domestic currency), invert the quoted number. Practical steps:
1. Confirm which side is the domestic currency (the country or account whose perspective you need).
2. If the quote is a single spot price, compute the reciprocal: indirect = 1 / direct.
3. If the quote is a two-way bid/ask (dealer market), invert both prices and swap them:
– indirect bid = 1 / direct ask
– indirect ask = 1 / direct bid
4. Round to the market convention (pips/decimal places) after inversion, not before, to avoid rounding bias.
Worked numeric example (with bid/ask)
Assume you are in the U.S. and see a EUR quote expressed as direct to you (USD per EUR):
– Direct market quote (USD per EUR): bid 1.1200 / ask 1.1210
To express this as EUR per USD (indirect):
– Indirect bid = 1 / direct ask = 1 / 1.1210 = 0.8924 (rounded)
– Indirect ask = 1 / direct bid = 1 / 1.1200 = 0.8929 (rounded)
Interpretation: an American now reads the price as roughly 0.8924–0.8929 euros for one U.S. dollar.
Cross-rate calculation (simple example)
To find the implied exchange rate between currency A and currency C using two market rates:
1. Start with A/B and B/C quotes.
2. Multiply A/B × B/C = A/C (careful with base/quote conventions).
Example:
– EUR/USD = 1.1200 (USD per EUR)
– USD/JPY = 110.00 (JPY per USD)
Implied EUR/JPY = EUR/USD × USD/JPY = 1.1200 × 110.00 = 123.20 (JPY per EUR)
Practical checklist for traders and students
– Identify base vs. quote currency in each pair.
– Note whether the displayed quote is direct (domestic currency per foreign) or indirect.
– For bid/ask quotes, invert and swap bid/ask when changing format.
– Mind pip size and decimal conventions (e.g., many JPY pairs use two decimal places).
– Include spreads and transaction costs when calculating effective rates.
– Use live market data for execution decisions; quoted examples are illustrative only.
Common pitfalls and how to avoid them
– Inverting numbers without swapping bid/ask: leads to wrong buy/sell levels.
– Rounding too early: do calculations at high precision, round at the end.
– Forgetting market conventions for a particular currency pair (some majors are quoted with USD as base; others are not).
– Ignoring liquidity and spread changes during volatile markets — the displayed mid-market rate may not be executable.
Summary
Direct quotes show how many units of the domestic currency are needed to buy one unit of foreign currency; indirect quotes invert that relationship. Converting between formats is straightforward mathematically (reciprocal), but requires care with bid/ask handling,
specifically: you must invert the numeric rate and swap the bid and ask before taking reciprocals. Below are concise rules, worked examples, a quick checklist, and common programming gotchas.
Rules for reciprocal conversion (direct ↔ indirect)
– Definitions:
– Direct quote: domestic currency price per one unit of foreign currency.
– Indirect quote: foreign currency price per one unit of domestic currency.
– If a direct quote (domestic per foreign) is quoted as bid_d / ask_d, then the indirect quote (foreign per domestic) is:
– bid_i = 1 / ask_d
– ask_i = 1 / bid_d
– Reason: the market-maker’s buy price in one convention becomes the sell price after inversion, so you must swap sides before inverting.
Worked numeric example — simple inversion
– Given (U.S. domestic, EUR foreign): EUR/USD = 1.1998 / 1.2002 (bid / ask).
– Invert to USD/EUR (foreign per domestic):
– bid_i = 1 / ask_d = 1 / 1.2002 = 0.833222…
– ask