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Explained for Beginners: Direct and Indirect quotes in Forex
Source: | Author:finance-102 | Date2022-12-26 | 158 Views | Share:
In the forex market, direct and indirect quotes are used to express the price of one currency in terms of another. This is important for traders, as it allows them to easily compare the value of different currencies and make informed trading decisions. A direct quote is a quote in which the price of a foreign currency is expressed in terms of the domestic currency, while an indirect quote is a quote in which the price of the domestic currency is expressed in terms of the foreign currency.

In the forex market, direct and indirect quotes are used to express the price of one currency in terms of another. This is important for traders, as it allows them to easily compare the value of different currencies and make informed trading decisions. A direct quote is a quote in which the price of a foreign currency is expressed in terms of the domestic currency, while an indirect quote is a quote in which the price of the domestic currency is expressed in terms of the foreign currency.


For example, if you are a trader based in the United States, you might use direct quotes to compare the value of the Euro against the US dollar. In this case, you would be interested in how many US dollars you would need to purchase one Euro. This information can be helpful for traders who want to take advantage of favorable exchange rates or who want to hedge against currency risk.

 

On the other hand, if you are a trader based in the Eurozone, you might use indirect quotes to compare the value of the US dollar against the Euro. In this case, you would be interested in how many Euros you would need to purchase one US dollar. This information can be helpful for traders who want to take advantage of favorable exchange rates or who want to hedge against currency risk.

 

Both direct and indirect quotes can be useful for traders, depending on their needs and trading strategies. It's important for traders to be familiar with both types of quotes to make informed trading decisions.

 

Here is the formula to calculate a direct quote:

 

Direct quote = Domestic currency amount / Foreign currency amount

 

For example, let's say you want to calculate the direct quote for the EUR/USD pair and you have 600 US dollars that you want to exchange for Euros. To calculate the direct quote, you would divide the amount of US dollars (600) by the amount of Euros that you want to buy. Let's say you want to buy 500 Euros. The direct quote would be calculated as follows:

 

Direct quote = 600 US dollars / 500 Euros

Direct quote = 1.2

 

This means that the direct quote for the EUR/USD pair is 1.2, which means that it takes 1.2 US dollars to buy 1 Euro.

 

To calculate an indirect quote, you would do the opposite and divide the amount of foreign currency into the amount of domestic currency. Here is the formula to calculate an indirect quote:

 

Indirect quote = Foreign currency amount / Domestic currency amount

 

For example, let's say you want to calculate the indirect quote for the EUR/USD pair, and you have 500 Euros that you want to exchange for US dollars. To calculate the indirect quote, you would divide the amount of Euros (500) by the amount of US dollars that you want to buy. Let's say you want to buy 600 US dollars. The indirect quote would be calculated as follows:

 

Indirect quote = 500 Euros / 600 US dollars

Indirect quote = 0.833

 

This means that the indirect quote for the EUR/USD pair is 0.5, which means that it takes 0.833 Euros to buy 1 US dollar.

 

It's important to note that both direct and indirect quotes are expressed as a ratio, with the domestic currency on the left and the foreign currency on the right. This can make it easier to compare different currency pairs and understand how their values are changing over time.