What Is an Indirect Quote?

In the world of foreign exchange, an indirect quote is a currency quotation that signifies the amount of foreign currency needed to trade one unit of the domestic currency. Often referred to as a “quantity quotation,” an indirect quote indicates the quantity of foreign currency required to purchase units of the domestic currency. In essence, the domestic currency serves as the base currency in an indirect quote, while the foreign currency is regarded as the counter currency.

Key Takeaways:

• An indirect quote in the foreign exchange markets reveals the amount of foreign currency essential to trade one unit of the domestic currency.
• Also known as a “quantity quotation,” an indirect quote communicates the quantity of foreign currency needed to acquire a unit of the domestic currency.
• A direct quote, on the other hand, presents the price of one unit of a foreign currency in terms of a variable number of units of the domestic currency.

Understanding Indirect Quotes

Contrasting with a direct quote, an indirect quote serves as the reciprocal opposite. A direct quote, known as a “price quotation,” articulates the price of one unit of a foreign currency relative to varying amounts of the domestic currency.

In the global foreign exchange sphere, the U.S. dollar (USD) reigns supreme, leading to the prevalent use of direct quotes where the USD is the base currency and other currencies like the Canadian dollar (CAD), Japanese yen (JPY), and Indian rupee (INR) function as the counter currency. Notably, currencies such as the euro and Commonwealth currencies such as the British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD) are typically quoted indirectly (e.g., GBP 1 = USD 1.30).

Taking the CAD as an example, if it is trading at 1.2500 to the U.S. dollar, the indirect quote would be C$1 = US$0.8000 (i.e., 1/1.2500). Here, the conventional foreign exchange market quotation is 1.2500, an indirect quote from the U.S. standpoint indicating how much CAD is required to obtain 1 USD. Conversely, USD 0.8000 would be a direct quote.

A lower exchange rate in an indirect quote implies the weakening or depreciation of the domestic currency. Referring back to the USD/CAD example, a transition to US$1 = C$1.2300 (indirect quote) indicates the USD weakening as less CAD is needed to secure 1 USD. In direct quote terms (0.8130, 1/1.2300), this means you’d get USD 0.8130 for 1 CAD, in contrast to 0.8000.

Currency Crosses

Delving into cross-currency rates, these rates reflect the price of one currency in relation to a currency other than the USD. Traders and investors should accurately determine whether a direct or indirect quotation is in use to price the cross-rate correctly.

For instance, with USD/JPY at 100 and USD/CAD at 1.2700, what is the CAD/JPY quotation from the perspectives of both Canada and Japan?

CAD/JPY (conventional quote) = USD/JPY ÷ USD/CAD

If the domestic currency is CAD, then

1 CAD (indirect) = 100 ÷ 1.2700 = 78.74 JPY

Meanwhile, if the domestic currency is JPY, then

1 JPY (indirect) = 1.2700 ÷ 100 = 0.0127 CAD