Where currency pairs are concerned, quoting can be done directly or indirectly. A few, especially those who are quite new to currency trading in the foreign exchange market, settled for the assumption that the matter is simple; the role of both currencies in a currency pair is to define exchange rates, and when the need for conversion comes, the task can be accomplished by altering their order. However, there’s actually more to the concept than meets the eye, and it’s one worth exploring.
What Are Direct Currency Quotes?
Direct currency quotes involve currency pairs in which the domestic currency serves as the base currency, and the foreign currency serves as the quoted currency; or, as some traders put it, “the domestic currency appears first and the foreign currency appears second in a pair”. A transaction with direct quotes shows that an amount of the domestic currency will be traded against a fixed unit of the foreign currency.
For example, a Japanese trader wants to exchange currencies; he wants to convert JPY to EUR. Since he’s from Japan, his domestic currency (i.e. Japanese Yen) is the base currency. It means that with 1 JPY, he can purchase 0.0073 EUR. And, as it follows, 137.30 JPY/EUR is the direct currency quote in his case.
What Are Indirect Currency Quotes?
Indirect currency quotes, also called quantity quotations, involve currency pairs in which the domestic currency serves as the quoted currency, and the foreign currency serves as the base currency; or, as some traders put it, “the foreign currency appears first and the domestic currency appears second in a pair”. A transaction with indirect quotes shows that an amount of the foreign currency will be traded against a fixed unit of the domestic currency.
Using a similar example (i.e. Japanese trader who wants to convert JPY to EUR), EUR is the base currency, while JPY is the quoted currency. It means that 1 JPY can be used to purchase 0.0073 EUR (or 1 EUR/137.3 JPY). And, as it follows, 0.0073 EUR/JPY is the indirect currency quote in his case.
The conversion from a direct currency quote to an indirect currency quote is done by using a multiplicative inverse or a reciprocal; as discussed in mathematics, the concept shows that both of the numbers involved are related.