Forex quotations can complex for the average person. It takes some practice and knowledge to fully understand that these quotations can be provided in more than one way. Also, a person should get used to it before he can quickly understand these quotes used and make keen decisions based on the same.
Any forex market quotation always uses the abbreviation of the currency under question. There are primary currency keys or currency codes that have been created by ISO. These keys are used for a transaction around the world.
The key is up of 3 letters. The first two letters of the key denote the country to which the currency belongs, whereas the third letter of the key is the first letter of the currency.
Thus, the U.S. dollar is denoted as the USD, Indian Rupee as INR, Great Britain Pound as GBP, and the Japanese Yen is referred to as JPY.
The exemptions to this rule would be currencies such as Euro, which is referred to as EUR, and mostly the Swiss Franc, which is CHF.
Direct Quotation – is a method where the quote is expressed in terms of the domestic currency. This means that the rate signifies how one unit of local currency relates to foreign currency. Hence, if a unit of the domestic currency were to be changed, how many units of the foreign currency would it create? This method is also cited as the price quotation method. Thus, if the value of the domestic currency rises, a smaller amount of it would have to be exchanged. A decrease in value would create a situation where a large amount of local money would have to be replaced. Therefore, it can be said that the quotation rate has an inverse relationship with the amount of domestic currency.
The value of the domestic currency is believed to be 1 in case of a direct quotation. The price being quoted discusses the number of units of foreign currency that can be replaced for a single unit of the domestic currency.
The direct quote process is one of the most used quotation methods around the world. This is the standard for quoting forex prices and is assumed de facto until another technique has been particularly mentioned.
Indirect Quotation – is the inverse method of the direct quotation method. In this method, the quote is articulated in terms of foreign currency. Hence, these rates assume one unit of foreign currency. It then means how many units of domestic currency are necessary to gain a single unit of foreign currency. Sometimes this quote is signified in terms of 100 units of foreign currency. This process is often cited as the quantity quotation method. Since this method is quoted in conditions of foreign currency, the quoted rate has a direct relation with the national rate. If the quote rise, the value of the local currency also rises.
The usage of indirect currency quotation is intensely rare. It is only in the Commonwealth countries such as the U.K. and Australia that the direct quotation method is used as an outcome of the convention.
The Rare Case of the U.S. Dollar
By convention, most quotations that involve the U.S. dollar give a direct quote for the dollar. This is because most countries are looking to purchase the reserve currency of the world. Thus, any currency pair involving the U.S. dollar will typically begin with USD/XXX, where XXX referred to the variable counter currency.
Therefore, even if a quote for INR and USD is received in India, it is written as USD/INR, although Indian Rupee is the domestic currency. It would be appropriate to provide an INR/USD quote. However, it would not be the forex market conversion.
A notable exemption to the rule mentioned above would be the Euro and Dollar pair, where Euro is still the domestic currency. Hence, any forex quotation can be explained in different ways based on the type of quotation that is being given, where it is being supplied, and various other market conventions and norms.