What is a Direct Quote?
A direct quote, also called a price quotation (although a price quotation is also used to refer to other things), is a foreign exchange rate quoted as home currency per foreign currency. A foreign exchange rate expresses one country’s currency, or money, in terms of another country’s currency and is usually quoted to between 4 and 6 decimal places. For example, France uses the euro (EUR), and suppose the EUR stated as a unit, were worth half of the U.S. Dollar (USD). In the U.S., a direct quote for France would be 0.5 dollars per 1 euro. In France, or any country that uses the euro as its currency, a direct quote for the U.S. would be 2 euros per 1 dollar. This also means if a person from France wanted to exchange 500 EUR for USD, he would get 250 dollars back. If a person from the U.S. traded 500 USD for EUR, he would get 1,000 euros back.
Most countries, including the United States, use a direct quote when expressing foreign exchange rates. Other countries, however, use indirect quotes, including Australia, New Zealand, and the Eurozone, or the group of European countries using the euro as currency. Indirect quotes put the exchange rate in terms of foreign currency per domestic currency. So, using the hypothetical situation above, an indirect quote in France for the United States would be 0.5 dollars per 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 putting the base currency on bottom and putting the term currency on top. The base currency, or unit currency, is the currency made to equal 1 and the term currency, or price currency, is the currency being compared with 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.
This is not, however, how it is properly written. 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, one would write that the EURUSD is 0.5. The order of the fraction is reversed. Whether writing a direct or an 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 home currency. This shows more clearly when looking at the equation used to find the direct quote of an exchange rate:
Exchange rate = domestic currency / foreign currency.
Assuming the foreign currency stays constant, if the value of domestic money, which is also the term currency, goes up, or appreciates, the exchange rate will go down. If the value of the home currency goes down, the exchange rate will go up. Alternatively, if the base currency goes up and the home 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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