What Is an Indirect Quote?
The term indirect quote is a currency quotation in the foreign exchange market that expresses the variable amount of foreign currency required to buy or sell one unit of the domestic currency. An indirect quote is also known as a “quantity quotation,” since it expresses the quantity of foreign currency required to buy units of the domestic currency. In other words, the domestic currency is the base currency in an indirect quote, while the foreign currency is the counter currency.
- An indirect quote in the foreign exchange markets expresses the amount of foreign currency required to buy or sell one unit of the domestic currency.
- An indirect quote is also known as a “quantity quotation,” since it expresses the quantity of foreign currency required to buy a unit of the domestic currency.
- The opposite of an indirect quote is a direct quote which expresses the price of one unit of a foreign currency in terms of variable number of units of the domestic currency.
Understanding Indirect Quotes
An indirect quote is the opposite, or reciprocal, of a direct quote, also known as a “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.
As the U.S. dollar (USD) is the dominant currency in global foreign exchange markets, the convention is to generally use direct quotes that have the U.S. dollar as the base currency and other currencies—like the Canadian dollar (CAD), Japanese yen (JPY) and Indian rupee (INR)—as the counter currency. Exceptions to this rule are the euro and Commonwealth currencies like the British pound (GBP), Australian dollar (AUD) and New Zealand dollar (NZD), which are typically quoted in indirect form (for example GBP 1 = USD 1.30).
Consider the example of the CAD, which we assume is trading at 1.2500 to the U.S. dollar. In Canada, the indirect form of this quote would be C$1 = US$0.8000 (i.e. 1/1.2500). However, the conventional quotation in foreign exchange markets is 1.2500, which is an indirect quote from the U.S. perspective because it shows how much of a foreign currency (CAD) is required to get 1 USD. Conversely, USD 0.8000 would be a direct quote.
In an indirect quote, a lower exchange rate implies that the domestic currency is depreciating, or becoming weaker. Continuing with the above example, if the USD/CAD quotation now changes to US$1 = C$1.2300 (indirect quote), then that means the USD (domestic currency) has gotten weaker as less CAD would be needed to get 1 USD. The direct quote, which is 0.8130 (1/1.2300), shows that 1 CAD will get you USD 0.8130, as opposed to 0.8000.
What about cross-currency rates, which express the price of one currency in terms of a currency other than the U.S. dollar? A trader or investors should first ascertain which type of quotation is being used—direct or indirect—to price the cross-rate accurately.
For example, if USD/JPY is quoted at 100, and USD/CAD is quoted at 1.2700, what is the quotation of CAD/JPY from both the Canadian and Japanese perspectives.
CAD/JPY (conventional quote) = USD/JPY ÷ USD/CAD
So, if domestic currency is CAD then
1 CAD (indirect) = 100 ÷ 1.2700 = 78.74 JPY
if domestic currency is JPY then
So, 1 JPY (indirect) = 1.2700 ÷ 100 = 0.0127 CAD