A direct quote is an exchange rate quoted as local currency for foreign currency, with most countries using this method. The base currency comes first and has an inverse relationship with the value of the local currency. Indirect quotes are used in some countries, such as Australia and New Zealand.
A direct quote, also called a price quote (although a price quote is also used to refer to other things), is an exchange rate quoted as local currency for foreign currency. An exchange rate expresses a country’s currency, or money, in terms of another country’s currency and is generally quoted to between 4 and 6 decimal places. For example, France uses the euro (EUR), and suppose that the EUR declared as a unit, was worth half the US dollar (USD). In the United States, a direct quote for France would be 0.5 dollars for 1 euro. In France, or any country that uses the euro as its currency, a direct quote for the US would be 2 euros to 1 dollar. This also means that if a person from France wanted to exchange 500 EUR for USD, he would get 250 dollars back. If a person from the US exchanged 500 USD for EUR, he would get 1,000 euros back.
Most countries, including the United States, use a direct quote when expressing exchange rates. However, other countries use indirect quotes, such as Australia, New Zealand and the Eurozone, or the group of European countries that use the Euro as their currency. Indirect quotes put the exchange rate in terms of foreign currency for domestic currency. So, using the above hypothetical situation, an indirect quote in France for the United States would be 0.5 dollars for 1 euro.
When thinking about exchange rates, it’s helpful to think of the rate as a fraction. For a direct quote, this would mean placing the base currency at the bottom and placing the term currency at the top. The base currency, or currency unit, is the currency made to equal 1 and the term currency, or price currency, is the currency that is compared to the base currency. In the hypothetical situation, the fraction would look like this for a direct quote from the United States to France: 0.5 USD/EUR.
However, that is not how it is written correctly. The abbreviation for the base currency goes directly before the abbreviation for the term currency. To use the same example, to write a direct quote for the exchange rate in the United States for France, you would write that EURUSD is 0.5. The order of the fraction is reversed. Whether you are writing a direct or indirect quote, the base currency comes first and the term currency comes second.
When expressing a direct quote, the exchange rate has an inverse relationship with the value of the local currency. This is shown most clearly when looking at the equation used to find the direct quote for an exchange rate:
Exchange rate = national currency / foreign currency.
Assuming that the foreign currency remains constant, if the value of the domestic money, which is also the term currency, rises or appreciates, the exchange rate will fall. If the value of the local currency falls, the exchange rate will rise. Alternatively, if the base currency goes up and the local currency stays constant, the exchange rate will go up, and if the foreign currency goes down, the exchange rate goes down.
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