Direct Quote
Direct quote is the convention of expressing currency exchange in terms of units of domestic currency per unit of foreign currency.
It is 'direct' in the sense that a resident knows the price of the foreign currency straight away.
What is a direct quote for a domestic resident is an indirect quote for the resident of the foreign country. An indirect quote is the exact opposite of the direct quote.
Formula
A direct quote can be converted to indirect quote by the following formula:
$$ \text{Direct Quote} = \frac{\text{1}}{\text{Indirect Quote}} $$
When a currency exchange rate is expressed in terms of bid-ask spread instead of a mid-quote, the direct bid becomes the indirect ask and direct ask becomes the indirect bid as explained in Example 3.
Examples
Example 1: A US resident converted US$20,000 to £12,800. What is the direct quote for the exchange rate prevalent at the time the transaction was made?
Answer: US dollar is the domestic currency while British pound is the foreign currency. In direct quote since exchange rate is expressed in terms of domestic currency per unit of foreign currency, direct quote between US dollar and British pound would be $1.5625 per £ (calculated by dividing $20,000 by £12,800).
$1.5625/£ is an indirect quote for the British resident.
Example 2: Exchange rate between US dollar and Swiss franc is 0.92 Swiss francs per US dollar.
Answer: It is direct quote for Swiss resident because from Switzerland perspective it is quoted as units of domestic currency per unit of foreign currency. An indirect quote would be US$1.087 per Swiss franc (=1/0.92).
Example 3: Exchange rate between US dollars and Canadian dollar is US$1.0211/C$ - US$1.0213/C$. Find the indirect quote for a US resident.
Solution: When exchange rates are expressed as bid − ask quotes, a reciprocal of the bid rate in direct quote becomes the ask quote in indirect quote, and the reciprocal of the ask rate in direct quote becomes the bid rate in indirect quote.
Indirect quote for exchange rate between US dollar and Canadian dollar for US resident would be C$0.9791/US$ - C$0.9793/US$, where C$0.9791/US$ = 1/(US$1.0213/C$), and C$0.9793 = 1/(US$1.0211/C$).
by Obaidullah Jan, ACA, CFA and last modified on