An indirect quote expresses the amount of foreign currency needed to purchase one unit of the domestic currency. In this format, the domestic currency is the base currency, and the foreign currency is the quote currency.

For example, if you are in the United States and see a quote stating USD/EUR = 0.85, it means 1 US dollar equals 0.85 euros. This indicates how much of the foreign currency (euros) is required to buy one unit of the domestic currency (US dollars).

Indirect Quote vs. Direct Quote

The distinction between indirect and direct quotes depends on which currency is considered the domestic currency:

• Direct Quote: Shows the amount of domestic currency needed to buy one unit of foreign currency. Using the previous example, a direct quote in the U.S. would be EUR/USD = 1.1765, meaning it takes 1.1765 US dollars to buy 1 euro.
• Indirect Quote: Shows the amount of foreign currency needed to buy one unit of domestic currency. In the same scenario, USD/EUR = 0.85 indicates that 1 US dollar can be exchanged for 0.85 euros.

Whether a quote is direct or indirect depends on the perspective of the person viewing the currency pair and their domestic currency.

Importance of Indirect Quotes in Forex Trading

Understanding indirect quotes is crucial for several reasons and some of the reason are:

1. Travel and Expenses: Travelers can use indirect quotes to determine how much foreign currency they will receive when exchanging their home currency, aiding in budgeting and expense planning.

2. Investment Decisions: Investors analyzing foreign assets need to understand indirect quotes to assess the value of their investments in domestic currency terms.

3. Economic Analysis: Economists and policymakers monitor exchange rates, including indirect quotes, to evaluate a country’s trade competitiveness and economic health.

How to Interpret Indirect Quotes

Interpreting indirect quotes involves understanding the relationship between the two currencies:

• Appreciation: If the indirect quote increases, it means the domestic currency is appreciating, as more foreign currency is needed to buy one unit of the domestic currency.

• Depreciation: If the indirect quote decreases, the domestic currency is depreciating, requiring less foreign currency to purchase one unit of the domestic currency.

For example, if the USD/EUR quote changes from 0.85 to 0.90, the US dollar has appreciated against the euro. Conversely, if it changes to 0.80, the US dollar has depreciated.

Practical Example

Consider a Canadian exporter who sells goods priced in Canadian dollars (CAD) to a European buyer. The current exchange rate is USD/CAD = 1.25.

This indirect quote from the U.S. perspective indicates that 1 US dollar equals 1.25 Canadian dollars. To determine how much USD they will receive, the exporter divides the amount in CAD by the exchange rate. If the sale is for CAD 10,000, the calculation is:

10,000 CAD ÷ 1.25 = 8,000 USD

This means the exporter will receive 8,000 US dollars for their goods.

Conclusion

Understanding indirect quotes is vital for anyone involved in forex trading, international business, or travel. It provides insight into the value of currencies relative to one another and aids in making informed financial decisions. By grasping the concept of indirect quotes, you can better navigate the complexities of the global financial market.

Related Term

Direct Quotation