What is a Direct Quote?
A direct quote is a terminology that we use in the foreign exchange market. It denotes the foreign exchange currency conversion rate of the domestic currency. The quote informs us about the current exchange rate between the two currencies and how many units of the domestic currency one needs to get one unit of the foreign currency. Usually, we use the US Dollar as the foreign currency and call it the base currency. We calculate the number of units of the domestic currency we will need against one unit of the US Dollar. The domestic currency, in this case, will be the quote currency.
We use the US Dollar as the base currency because it is the most popular and stable currency in the world. It is backed by a very strong economy and a solid government. In case we have to calculate the value of two currencies without including the US Dollar in the equation, we call it the cross-currency rate.
What is the opposite of a Direct Quote?
We state the exchange rate between two currencies in either of the two ways- direct quote or indirect quote. An indirect quote is the opposite of a direct quote. The quote informs us about the current exchange rate between the two currencies and how many units of the foreign currency one needs to get one unit of the domestic currency.
Using the direct quote is simpler than the indirect quote. The user easily understands the number of units of domestic currency that he will require against one unit of foreign currency. So if this rate goes up, we can easily interpret that the domestic currency depreciates. This is so because he will require more units of his domestic currency now to buy one unit of the foreign currency.
The opposite case also holds. If the exchange rate goes down, we interpret it as an appreciation in the value of the domestic currency. Appreciation in the domestic currency happens when we will require a lesser number of units of the domestic currency for buying one unit of the foreign currency.
Direct Quote: Example
Let us understand the concept of the direct quote with the help of an example. Suppose the direct quote of USDINR is 78. This means that we require 78 INR to buy one US Dollar at present. The base currency in this expression is the US Dollar. INR is the quote currency.
If this rate falls to 77. It will mean that we need 1 INR lesser to buy one unit of US $. Hence, INR appreciates, and its value has gone up. Similarly, if this rate falls to 79. It will simply mean that we will need one extra INR to buy one US$ in the foreign exchange market. Therefore, INR is depreciating, and its value is going down.
We denote the indirect quote as [1/ direct quote]. Therefore, in our present example, we will calculate the indirect quote as 1/78= 0.0128. This is the number of US Dollars we will get against one unit of INR.
Advantages of Direct Quote
Using the direct quote in the forex markets has several advantages.
- It is very simple to use. We denote it in terms of the domestic currency. Any person can easily understand how many units of the domestic currency he will require against one unit of the foreign currency, usually denoted in US Dollars.
- The direct quote makes it very easy to understand the complex terminologies of the appreciation and depreciation of a currency. The need for a higher number of units of the home currency for one US Dollar signifies depreciation of the home currency. Similarly, lesser units of home currency for one US Dollar will mean appreciation of the home currency.
- A direct quote helps to understand the value of the domestic currency against other currencies of the world too. Evaluation is not just restricted to comparison with the US Dollar only. If a currency is appreciating against the major currencies of the world, the public at home gets an open signal that their economy is performing well. This helps to build confidence and stability in the economy.