What Is an Indirect Quote?
An indirect quote in the foreign exchange market refers to a currency quotation that expresses the variable amount of foreign currency required to buy or sell one unit of the domestic currency. Alternatively, it can be described as a “quantity quotation” since it indicates the quantity of foreign currency needed to trade for a single unit of the domestic currency. For instance, if we consider the U.S. dollar (USD) as our base currency, an indirect quote would reflect how many units of a foreign currency are required to purchase or sell one unit of USD.
To make it clearer, let’s discuss the differences between direct and indirect quotes using a practical example. Consider the exchange rate between the U.S. dollar (USD) and the Canadian dollar (CAD), with the USD currently trading at 1.2500 against the CAD. This quote can be represented as an indirect quote, where 1 CAD equals X USD. In this context:
C$1 = US$1 / 1.2500
From a Canadian perspective, if they are looking to purchase or sell one unit of their currency against the U.S. dollar, they would use this indirect quote to determine the required amount of foreign currency needed for each transaction. In contrast, investors and traders dealing with currencies other than the base currency (USD) usually observe direct quotes that display the price of a unit of the foreign currency in terms of USD.
For exceptions like the euro (EUR) and Commonwealth currencies such as the British pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD), indirect quotes are customary because they express how many units of their respective currencies can be bought with one unit of the U.S. dollar. This is a reversed perspective from direct quotes, which represent the cost of one unit of the foreign currency in terms of USD.
In an indirect quote, lower exchange rates signal that the domestic currency (denoted by the base currency) is experiencing depreciation or weakening against the counter currency. For example, if the USD/CAD exchange rate changes to US$1 = C$1.2300, this implies a weakened USD as less Canadian dollars are now needed to purchase 1 U.S. dollar. The direct quote, which is 0.8130 (1/1.2300), shows that one Canadian dollar will buy USD 0.8130, instead of the previous 0.8000.
Understanding this concept is crucial for traders and investors to make informed decisions when dealing with currency crosses—prices where one currency is quoted against another, without referencing the U.S. dollar as a middleman. To determine the quotation for a cross-currency rate, it’s necessary to understand which type of quote (direct or indirect) is being utilized to ensure accurate pricing and interpretation. For instance, if we have USD/JPY quoted at 100 and USD/CAD at 1.2700, we can calculate CAD/JPY quotes from both the Canadian and Japanese perspectives:
From a Canadian perspective:
1 CAD = USD 1 / 1.2700
= 0.7813 JPY (indirect quote)
From a Japanese perspective:
1 JPY = USD 1 * 1.2700
= 0.0078 USDCAD (direct quote)
This understanding of indirect quotes plays a significant role in foreign exchange markets, enabling traders and investors to evaluate currencies effectively and make well-informed decisions based on their unique requirements.
Direct vs. Indirect Quotes: A Brief Overview
In the foreign exchange markets, quotations can either be direct or indirect. Direct quotes express the price of a unit of a foreign currency in terms of domestic currency units, while indirect quotes indicate the amount of foreign currency needed to purchase one unit of domestic currency. An indirect quote is also referred to as a quantity quotation since it specifies the number of foreign currencies required for one unit of the base or domestic currency.
The primary distinction between these two types of quotes lies in their perspectives: direct quotes represent the viewpoint from the home or base currency, while indirect quotes reflect the standpoint from the counter or foreign currency. This convention is essential for understanding exchange rates and trading within the context of the global financial markets.
Direct Quotes vs. Indirect Quotes
Direct quotes express the cost of a single unit of a foreign currency using domestic currency units. For instance, if one U.S. dollar (USD) equals ten British pounds (GBP), then the direct quote is USD/GBP = 10. This implies that ten GBP are required to buy one USD.
Conversely, indirect quotes showcase the amount of foreign currency required to acquire one unit of domestic currency. For example, if it takes 20 Canadian dollars (CAD) to purchase one U.S. dollar, then the indirect quote would be CAD/USD = 0.05. This represents the inverse relationship, where twenty CADs are needed for a solitary USD.
Dominant Base Currency: US Dollar
When it comes to foreign exchange markets, the U.S. dollar (USD) is the leading currency, and most direct quotes involve the USD as the base currency. Consequently, indirect quotes predominantly feature other currencies against the USD. The euro (EUR) and Commonwealth currencies like the British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD) are common exceptions to this convention.
Interpreting Indirect Quotes
An indirect quote can be deciphered by focusing on the number of foreign currency units required for one unit of domestic currency. A lower exchange rate in an indirect quote indicates depreciation, or weakening, of the domestic currency. Conversely, a higher exchange rate signifies appreciation, or strengthening, of the domestic currency.
For instance, if CAD/USD is quoted at 0.95, this indicates that it takes 0.95 units of Canadian dollars to acquire one U.S. dollar. Since the CAD’s exchange rate against the USD has decreased from 1.2500 in our earlier example, this implies a weaker Canadian dollar relative to the USD, which is a depreciation of the CAD.
Currency Crosses and Indirect Quotes
Currency cross-rates involve pricing one currency against another without involving the U.S. dollar as an intermediary. These rates are essential for understanding international trade and exchange between various currencies. To accurately price a currency cross, it is crucial to differentiate between direct and indirect quotes and determine which perspective you are taking into account.
For example, let’s consider the exchange rate between Japanese yen (JPY) and the Canadian dollar (CAD), expressed as CAD/JPY. The calculation for an indirect quote from a Canadian perspective is: CAD/JPY = USD/JPY ÷ USD/CAD So, if USD/JPY = 105 and USD/CAD = 1.26, then CAD/JPY (indirect quote) = 105 ÷ 1.26 ≈ 83.34
In contrast, the indirect quote from a Japanese perspective would be: JPY/CAD = JPY/USD × USD/CAD So, if JPY/USD = 97 and USD/CAD = 1.26, then JPY/CAD (indirect quote) ≈ 75.30
Advantages and Disadvantages of Indirect Quotes
Direct quotes are advantageous for those who prefer a more straightforward representation of exchange rates since they provide an immediate understanding of how many units of the foreign currency can be bought with a single unit of domestic currency. However, indirect quotes offer insight into the relative value of currencies when comparing two currencies against each other.
In summary, understanding the distinction between direct and indirect quotes is vital for engaging with the intricacies of the global foreign exchange markets. Both quotation types provide essential information and cater to different perspectives on exchange rates, enabling traders and investors to make informed decisions based on market conditions.
Domestic Currency as Base Currency
In the foreign exchange market, the U.S. dollar is the most widely traded currency and is used as a reference point for expressing exchange rates between other currencies. The U.S. dollar’s dominance results in exchange rates being quoted using the U.S. dollar as the base currency more often than not. Consequently, indirect quotes are commonly employed when dealing with foreign currency transactions against the U.S. dollar.
An indirect quote expresses the amount of foreign currency required to buy or sell one unit of the domestic currency. It’s called an “indirect quote” because the exchange rate is stated in terms of the quantity of the foreign currency needed to acquire a single unit of the domestic currency. The reverse of this relationship is referred to as a direct quote, which shows the value of a single unit of a foreign currency in terms of units of the domestic currency.
For instance, if we consider the exchange rate between the U.S. dollar (USD) and Canadian dollar (CAD), when it’s quoted at 1.2500 to the U.S. dollar, then an indirect quote would represent how many Canadian dollars are needed to buy one U.S. dollar. In this context, C$1 = US$0.8000. Conversely, when quoting a direct exchange rate between USD and CAD with the U.S. dollar as the base currency, the relationship is reversed and expressed as US$1 = C$1.2500.
While most currencies are typically quoted using the U.S. dollar as the base currency, there are exceptions. The euro (EUR) and certain Commonwealth currencies like the British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD) are often quoted indirectly in foreign exchange markets.
Understanding Indirect Quotes
An indirect quote is a quotation that shows how many units of a foreign currency are needed to buy or sell one unit of the domestic currency. In other words, it expresses the amount required to purchase or sell the base currency (domestic currency) in terms of the counter currency (foreign currency). An indirect quote is also called a “quantity quotation,” as it reveals the quantity of foreign currency necessary to buy a single unit of the domestic currency.
When using an indirect quote, a lower exchange rate implies that the domestic currency is depreciating or weakening against the foreign currency. For example, if we go back to our previous U.S. dollar and Canadian dollar example and the USD/CAD quotation now changes to US$1 = C$1.2300, then it implies that less Canadian dollars are needed to buy one U.S. dollar. Consequently, the USD has weakened, as evidenced by the indirect quote 1 CAD = US$0.8276 (1/1.2300) or a direct quote of US$1.2300 = 1 CAD.
Currency Crosses and Indirect Quotes
Currency crosses refer to exchange rates that involve the pricing of one currency against another in terms not related to the U.S. dollar. To calculate an indirect quote for a currency cross, it is essential to identify which currency is being used as the base currency from both perspectives.
For instance, when considering the example of USD/JPY and USD/CAD exchange rates quoted at 100 and 1.2700 respectively, we can determine an indirect quote for CAD/JPY from both the Canadian and Japanese perspectives.
From a Canadian perspective:
CAD/JPY (indirect) = USD/JPY ÷ USD/CAD
CAD/JPY = 100 ÷ 1.2700 = 78.59 JPY
From a Japanese perspective:
JPY/CAD (indirect) = USD/CAD ÷ USD/JPY
JPY/CAD = 1.2700 ÷ 100 = 0.0127 CAD
This information can be used to analyze currency movements and market trends effectively.
Exceptions: Currencies Quoted Indirectly
The term indirect quote, as opposed to a direct quote, expresses the amount of foreign currency required to buy or sell one unit of the domestic currency in the foreign exchange market. In other words, it is also known as a quantity quotation since it indicates the amount of foreign currency needed for a single domestic currency unit.
Unlike the U.S. dollar (USD), which usually functions as the base currency and follows a direct quote convention, certain currencies such as the euro (EUR) and Commonwealth currencies including the British pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD), are generally quoted indirectly.
For instance, if the exchange rate for the U.S. dollar to euro (USD/EUR) is 1.2500, it would mean that one Euro is equivalent to 0.800 US dollars (indirect quote). Here, the euro acts as the counter currency and is quoted indirectly based on the amount of US dollars needed to buy one euro. The reverse of this exchange rate represents a direct quote for the EUR/USD pair which shows that one US dollar can purchase 1.2500 Euros.
The primary reason for these exceptions arises from historical usage and trading conventions. The dominance of the U.S. dollar in global foreign exchange markets leads to the majority of quotes featuring the USD as the base currency. However, countries with currencies like GBP, AUD, and NZD have different histories and preferences when it comes to quoting their currencies against the US dollar or other currencies.
The indirect quotation method provides a comprehensive understanding of exchange rates and helps investors and traders appreciate the impact on buying and selling foreign currencies from various perspectives. When examining an indirect quote, the depreciation or appreciation of the domestic currency can be determined by observing if the amount of foreign currency required to purchase one unit of the domestic currency is increasing or decreasing.
As a side note, the calculation methods for determining indirect quotes remain identical to their counterparts in direct quotes but offer an alternative perspective when examining exchange rate relationships between various currencies. In essence, understanding both forms of quotations enables investors and traders to better grasp the intricacies of foreign exchange markets and make more informed decisions.
Calculating Indirect Quotes
In the foreign exchange market, an indirect quote expresses the amount of a foreign currency required to buy or sell one unit of the domestic currency. This is also known as a quantity quotation because it reveals the number of units of the foreign currency that are needed for one unit of the domestic currency. To calculate indirect quotes, follow these steps:
1. Understand the direct quote: Be familiar with the direct quote—the price of one unit of a foreign currency in terms of a variable number of units of the domestic currency. For instance, if the euro is trading at €1 = $1.2500 against the U.S. dollar, this implies that it takes $1.25 to buy one euro (direct quote).
2. Convert to indirect quotation: To calculate the indirect quote, divide 1 by the direct quote’s exchange rate. For our example above, the indirect quote for €1 would be €1 = $1.2500 ➔ 1 ÷ $1.2500 = €0.8000. This means that it takes €0.8 to buy one U.S. dollar (indirect quote).
3. Depreciation or Appreciation: Remember, a lower exchange rate in an indirect quote implies the domestic currency is depreciating, or weakening. Conversely, a higher exchange rate indicates the domestic currency is appreciating, or strengthening. For example, if the direct quote for GBP is £1 = $1.4200 and the indirect quote is £1 = $0.7069, then it’s evident that the British pound has depreciated (weakened) against the U.S. dollar.
4. Currency Crosses: When dealing with currency cross rates—prices of one currency in terms of another currency instead of the domestic currency—be sure to determine if direct or indirect quotes are being used before calculating. For instance, if USD/JPY is quoted at 108 and EUR/USD is quoted at $1.2350, first calculate the USD/EUR cross rate: USD/EUR = USD/JPY × EUR/USD Then convert from direct to indirect quote: USD/EUR (indirect) = USD/JPY ÷ EUR/USD
An example: Suppose the Australian dollar is trading at AUD $0.7350 against the U.S. dollar. The calculation for the indirect quote would be:
1. Direct quote: US$1 = AUD $0.7350
2. Indirect quote: AUD = US$1 ÷ $0.7350 = US$1.3648
As a result, AUD 1.0 requires US$1.3648 to buy it (indirect quote).
Currency Crosses and Indirect Quotes
In the foreign exchange market, direct quotes are commonly used with the U.S. dollar (USD) as the base currency to price other currencies. However, some exceptions exist, particularly for the euro (EUR), British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD). In contrast to direct quotes, indirect quotes express how much foreign currency is required to buy or sell one unit of a domestic currency.
When it comes to currency crosses, which represent the price of one currency in terms of another currency rather than the U.S. dollar, it’s essential to understand both the conventional quote and the perspective from the individual currencies involved. In order to accurately calculate indirect quotes for currency crosses, you need to determine the appropriate formulas based on whether the domestic currency is being considered as the base or counter currency.
Assuming we have two exchange rates: USD/CAD = 1.2700 and USD/JPY = 100. To find the indirect quotes for CAD/JPY, you’ll need to apply different formulas depending on which currency serves as the domestic or base currency.
First, let’s consider the case when the Canadian dollar (CAD) is the domestic currency:
CAD/JPY (indirect quote – Canadian perspective) = USD/JPY / USD/CAD
By applying this formula, we get 1 CAD = JPY ÷ (1.2700 ÷ 1) = 0.8096
Now let’s consider the Japanese yen (JPY) as the domestic currency:
JPY/CAD (indirect quote – Japanese perspective) = USD/CAD × USD/JPY
Applying this formula results in JPY = CAD × (1 ÷ 1.2700) = 0.7874
In both scenarios, lower exchange rates for the domestic currency imply depreciation or weakening, while higher exchange rates indicate appreciation or strengthening. The calculations demonstrate how indirect quotes are essential when dealing with currency crosses and help traders and investors understand the interplay between different currencies’ values.
For more insight into indirect quotes, explore the other sections in this article, including direct vs. indirect quotes, calculating indirect quotes, interpreting indirect quotes, and frequently asked questions about indirect quotes in foreign exchange markets.
Interpreting Indirect Quotes: Depreciation or Appreciation?
An indirect quote is an essential tool for investors and traders involved in the foreign exchange market to price their transactions. This type of quote indicates the amount of a foreign currency required to buy or sell one unit of a domestic currency, making it a “quantity quotation.” Conversely, a direct quote represents the value of one unit of a foreign currency in terms of the domestic currency, commonly referred to as a “price quotation.”
When examining an indirect quote, understanding the implications of exchange rates becomes crucial. A lower exchange rate denotes that the domestic currency is depreciating or weakening relative to the counter currency, meaning more units of the foreign currency are needed to purchase the same value of the domestic currency. On the other hand, a higher exchange rate implies an appreciation or strengthening of the domestic currency, requiring fewer units of the foreign currency for the equivalent value of the domestic currency.
For instance, let us consider the United States dollar (USD) and Canadian dollar (CAD) exchange rate quoted at 1.2500 in indirect terms: C$1 = US$0.8000. In this situation, 1 CAD is equal to 0.8 USD; therefore, it would take 0.8 units of the U.S. dollar to acquire 1 Canadian dollar. If the exchange rate shifts to US$1 = C$1.2300 (indirect), 1 USD now buys 1.23 CAD, meaning that the value of 1 U.S. dollar has increased in relation to the Canadian dollar. Consequently, it takes fewer units of Canadian dollars to buy a single US dollar—a sign of Canadian dollar depreciation or weakening against the U.S. dollar.
In the context of currency crosses, both the direct and indirect quotes are vital for correctly interpreting the exchange rate dynamics between two currencies. A trader or investor must determine which quotation is being used—direct or indirect—to analyze the cross-rate accurately. For instance, let’s examine a USD/JPY exchange rate quoted at 100 and a USD/CAD exchange rate of 1.2700.
First, calculate the CAD/JPY quote using the indirect method:
Indirect CAD/JPY quotation from the Canadian perspective = 100 ÷ 1.2700 = 78.57 JPY per CAD
Now, determine the JPY/CAD quotation using the direct approach:
Direct JPY/CAD quotation from the Japanese perspective = 1.2700 × 100 = 127.00 CAD per JPY
Examining these quotes reveals that 1 JPY is equivalent to approximately 0.007857 CAD using the indirect quote method, whereas a direct quote of 127.00 CAD per JPY shows that it takes 127 CAD to buy 1 JPY. By analyzing these quotations in conjunction with one another, it becomes clear that the Canadian dollar is weaker against the Japanese yen as more units of CAD are required to purchase the equivalent value of JPY based on the indirect quote. Conversely, the direct quote shows that fewer units of JPY are necessary for purchasing an equal amount of CAD.
In summary, understanding the concept of indirect quotes and their implications is essential for foreign exchange market participants looking to analyze currency exchange rates and profit from their investment decisions. This knowledge enables traders and investors to accurately assess the value of different currencies against one another in various contexts, such as cross-rates and domestic exchange rates.
Real-Life Example: USD/CAD Indirect Quotes
Understanding Indirect Quotes in the context of Foreign Exchange Markets
An indirect quote refers to a currency quotation expressing the quantity of foreign currency required to buy or sell one unit of the domestic currency. It is also known as a “quantity quotation.” When examining an indirect quote, the domestic currency functions as the base currency, while the foreign currency acts as the counter currency.
The opposite of an indirect quote is a direct quote (or price quotation), which expresses the price of one unit of a foreign currency in terms of a variable number of units of the domestic currency. In today’s global forex markets, the U.S. dollar (USD) dominates as the most traded base currency against various currencies such as the Canadian dollar (CAD), Japanese yen (JPY), and Indian rupee (INR).
However, exceptions exist for currencies like the euro (EUR) and Commonwealth currencies, including the British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD. When examining the example of the CAD/USD exchange rate with a quotation of 1.2500, we find that from the Canadian perspective, C$1 = US$0.8000 (indirect quote). Conversely, USD 0.8000 is the direct quote representing the price of one U.S. dollar in terms of Canadian dollars.
Analyzing Indirect Quotes: Depreciation vs. Appreciation
When engaging with an indirect quote, a lower exchange rate reveals that the domestic currency is depreciating or weakening. In our previous example, if the USD/CAD quotation changes to US$1 = C$1.2300 (indirect quote), it indicates that the U.S. dollar has weakened as fewer Canadian dollars are needed to acquire one U.S. dollar. Conversely, a higher exchange rate indicates that the domestic currency is appreciating or strengthening.
Calculating Indirect Quotes: A Step-by-Step Guide
To calculate an indirect quote, follow these steps:
1. Obtain the direct quotation (expressing the price of one unit of a foreign currency in terms of the domestic currency).
2. Invert the decimal point and swap the base and counter currencies.
3. Divide the direct quote’s value by 100 to obtain the indirect quote.
For instance, if USD/CAD is quoted at 1.2700 (indirect quote), follow these steps to find the equivalent direct quote:
1. Direct quotation: 1 unit of CAD = US$1.27 or US$1 = CAD $0.8038 (1/1.27)
2. Invert decimal point: CAD $0.8038
3. Divide by 100: USD $1 = CAD $0.008038
Currency Crosses and Indirect Quotes
In the context of currency crosses, understanding the distinction between direct and indirect quotes is crucial for calculating accurate exchange rates. For example, when considering a currency pair like USD/JPY with a quotation of 100, and a USD/CAD quote of 1.2700, determining CAD/JPY using both the Canadian and Japanese perspectives requires applying these indirect quotes:
CAD/JPY (conventional quote) = USD/JPY / USD/CAD
From the Canadian perspective: C$1 = US$1 / 1.2700 = 0.7874 JPY
From the Japanese perspective: ¥1 = 1.2700 * US$1 = ¥0.7965 CAD
In conclusion, indirect quotes play a vital role in the foreign exchange market as they express the quantity of a foreign currency required to buy or sell one unit of the domestic currency. Understanding the implications and calculation methods of indirect quotes will enable investors and traders to make well-informed decisions while engaging with various currencies and their respective markets.
Advantages and Disadvantages of Indirect Quotes
Indirect quotes in the foreign exchange market provide valuable information for traders, investors, and businesses, enabling them to compare currency values against their base currency (usually the U.S. dollar). This section delves into the advantages and disadvantages of using indirect quotes when engaging in foreign exchange transactions.
Advantages:
1. Transparency: Indirect quotations offer transparency as they provide a clear picture of how much foreign currency is needed to buy or sell one unit of the domestic currency. This information can be crucial for businesses that need to make international payments and require accurate knowledge of the exchange rate between their local currency and other currencies, especially if they have frequent transactions with various counterparts.
2. Convenience: Indirect quotes are easy to read and understand for those unfamiliar with foreign exchange markets, making them a popular choice among beginners or casual investors. Moreover, indirect quotations follow the convention of expressing the domestic currency as the base currency. This can be more intuitive for users since it aligns with their everyday experiences in dealing with their local currencies and making transactions.
3. Comparability: Indirect quotes allow traders to easily compare exchange rates between different currency pairs, which is particularly valuable when considering multiple transactions that involve various currencies. For example, a trader may need to simultaneously sell British pounds (GBP) in exchange for Australian dollars (AUD) and buy Canadian dollars (CAD) against the U.S. dollar. By examining indirect quotes, they can quickly assess which currency pair offers the most favorable exchange rate.
Disadvantages:
1. Market Complexity: While indirect quotations may be more accessible for beginners, their use in complex financial situations can lead to confusion and errors. For instance, traders might make mistakes when applying the wrong currency pair or misinterpreting the implications of an exchange rate change from one currency’s perspective versus another.
2. Conversion Complexity: Indirect quotes require a conversion process for users who want to understand the equivalent direct quote. This additional step may introduce potential errors and complications in transactions, especially when dealing with multiple currency pairs or making frequent exchanges between currencies. Additionally, indirect quotes might not be as easily accessible as direct quotes on various financial platforms, which can result in delays or inconvenience for users who prefer to work with direct quotes.
3. Misinterpretation: The main disadvantage of indirect quotes is the potential for misinterpreting exchange rate changes when focusing solely on the quoted numbers. For instance, a lower exchange rate in an indirect quote might be mistakenly perceived as an appreciation (strengthening) of the domestic currency when it actually represents depreciation (weakening). This could lead to incorrect trading decisions and potentially large losses for traders or businesses that rely on accurate information for making foreign exchange transactions.
In conclusion, while indirect quotes offer several advantages like transparency, convenience, and comparability, they also come with disadvantages such as market complexity, conversion complexity, and misinterpretation potential. Traders, investors, and businesses must be aware of these factors when using indirect quotes for their foreign exchange transactions to mitigate the risks and fully leverage their benefits.
FAQs: Indirect Quotes in the Foreign Exchange Market
Indirect quotes, also known as quantity quotations, are a currency quotation method in the foreign exchange market expressing the amount of foreign currency required to buy or sell one unit of the domestic currency. In an indirect quote, the domestic currency acts as the base currency while the foreign currency is the counter currency. Below, we address some common questions regarding indirect quotes in the foreign exchange market.
1. What Is the Difference Between Direct and Indirect Quotes?
Direct quotes (also called price quotations) represent the price of one unit of a foreign currency in terms of variable units of the domestic currency. Indirect quotes, on the other hand, express the amount of foreign currency required to buy or sell one unit of the domestic currency. For instance, if a quote is USD 1 = 0.8000 CAD, this represents an indirect quote for CAD buyers as they need 0.8000 units of CAD to purchase 1 USD.
2. Which Currencies Are Typically Quoted Indirectly?
The euro and Commonwealth currencies like the British pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD) are usually quoted indirectly in the foreign exchange market. For example, GBP 1 = USD 1.30 would be an indirect quote for the pound against the U.S. dollar.
3. What Does a Lower Indirect Quote Imply?
A lower indirect quote implies depreciation or weakening of the domestic currency since it requires a larger quantity of foreign currency to buy the same number of units of the domestic currency. In our example, CAD 1 = USD 0.8000 represents a stronger Canadian dollar than CAD 1 = USD 0.9500, as more CAD is needed to purchase the same amount of USD with the latter quote.
4. How Can I Calculate an Indirect Quote?
To calculate indirect quotes, you need to know the direct quotation (price quotation) and invert it by taking its reciprocal. For example, to obtain the indirect quote from the given direct quote USD 1 = CAD 0.8000, you would divide 1 by 0.8000 (reciprocal): CAD 1 = USD 1/0.8000 or CAD 1 = USD 1.25.
5. How Does the Concept of Indirect Quotes Apply to Currency Crosses?
To determine indirect quotes in a currency cross, traders and investors need first to ascertain which type of quotation is being used—direct or indirect—to price the cross-rate accurately. For instance, if USD/JPY is quoted at 100, and USD/CAD is quoted at 1.2700, the CAD/JPY quote will depend on whether the domestic currency is the Canadian dollar (indirect) or Japanese yen (direct). From a Canadian perspective, the CAD/JPY indirect quote would be calculated as follows: CAD/JPY = USD/JPY ÷ USD/CAD. By using this formula, you’ll get an accurate reflection of the exchange rate when dealing with indirect quotes.