Understanding Direct and Indirect Currency Quotations: Features and Applications

In the financial market, the concept of currency quotation is foundational to trading. Currency prices, which fluctuate every minute, drive the movements on financial charts. Without these, trading would cease, and the entire market economy would collapse.

This article explores terms such as direct and indirect currency quotations, cross rates, and spreads. Additionally, it discusses who determines these quotations in the forex market and provides practical examples.

What is a Currency Quotation?
A currency quotation represents the current average price of a currency, compiled from various liquidity providers in the forex market and transmitted to your trading platform. Since each broker collaborates with different providers, the quotations for the same currency pairs can vary. In forex, a pair is formed from two currencies, each represented by a three-letter ticker code. The base currency is listed first, followed by the quote currency, for example, in the pair USDRUB, the USD is the base, and the RUB is the quote.

There are three primary types of online prices:

• Direct Currency Quotation: Here, the base currency, which could be USD, EUR, AUD, or NZD, is listed first.
• Indirect Quotation: The quote starts with the national currency of any country other than those mentioned above.
• Cross Rate: This is a pair that does not include the US dollar.

Direct Quotation in Forex
A direct currency quotation denotes the value of the base currency relative to the second currency in the pair. For example:
USDRUB = 72 (direct quotation)

In some pairs, the euro is first, such as EURUSD. Indeed, the euro, along with the Commonwealth currencies like the British pound (GBPUSD), Australian dollar (AUDUSD), and New Zealand dollar (NZUSD), are also examples of direct quotations.

A decrease in such a pair indicates that the dollar/euro/pound is weakening internationally.

Indirect (Indirect) Quotation on Forex
An indirect currency quotation, the opposite of a direct quote, indicates the amount of foreign currency needed to purchase one US dollar or the number of dollars needed to exchange for one euro.

Imagine being in the US and seeing the rate for an artificial pair like RUBUSD; this would provide an indirect quote for the national currency, the dollar. Such a pair does not trade on forex but could be used for internal calculations and physical dollar-to-ruble exchanges in banks within the country. Thus, we find out not the current USD rate but the price of the ruble: how many US dollars it currently fetches on the exchange.

A drop in an indirect quote indicates the weakening of a specific region’s currency. As you can see, direct and indirect quotes are crucial for the forex industry, underpinning settlements and vividly demonstrating the state of the national economy.

Cross Rates
Since the US dollar (USD) is the primary currency for global settlements, exchange rates are typically expressed relative to the USD, which also forms the basis of cross rates.

For instance, EURJPY is a cross rate of EURUSD and USDJPY. The dollar does not participate in the pair directly, but its market changes will affect the price of EURJPY. Also, if you know the current exchange rates of USDEUR and USDGBP, you can multiply one by the other to get the EURGBP quote.

Like with dollar-containing currency pairs, the base currency always equals one relative to which the quantity of the second quoted currency changes.

Types of Exchange Rates
Exchange rates are set based on different calculation options in the currency market. Here, currencies are bought and sold 24/5, excluding weekends.

Floating and Fixed Exchange Rates
The currency rate changes constantly, hence called floating. It is determined by market conditions and is used by most countries. However, some prefer to fix the price of foreign currency relative to the US dollar, creating a national fixed rate.

For example, the Central Bank of the Russian Federation sets a fixed rate for the dollar/ruble pair for “tomorrow” calculations, and this rate applies throughout the next working day. Based on it, banks in the country conduct currency exchanges among the population.

Spot and Forward Exchange Rates
Exchange rates can also be divided into two types: spot and forward.

• Spot exchange rate: This is the current quotation in forex at any given time.
• Forward rate: Designed for future currency delivery and payment.

Spread and Pips
Spread (spread) is the natural market commission for opening a deal, represented as the difference between the buy and sell prices.

• Bid Price: This is the demand price or quote at which the trader declares their willingness to buy currency in the market. The lower the Bid, the more favorable it is for the trader.
• Ask Price: This is the quote at which the seller wants to sell the commodity. The higher it is, the more favorable it is for a trader who opens a deal to sell.
• The Ask is always higher than the Bid, which constitutes the spread. For major currency pairs, spreads are usually smaller (narrower) due to their high trading volume and liquidity. The EURUSD pair is the most popular among traders, so it is not surprising that the spread for it can start from 0.2 points.

However, when executing trades, the essence of Bid and Ask switches places: currency purchases are made at the Ask price, and sales — at the Bid price. This is why a deal initially appears to be slightly in the red – understanding the concepts of spread, Bid, and Ask is crucial.

Conclusion
We have examined what direct and indirect quotes on Forex entail. As you can see, this forms the basis of any financial market because it reflects the most crucial aspect – the current price of investment assets. Differences between types of quotes and the prices for buying and selling are reflected in the trading terminal. To understand why a deal initially starts at a slight loss, it is important to grasp the concepts of spread, Bid, and Ask thoroughly.