Forex quotations can be quite complex for the average person. It takes some training and knowledge to understand that these quotations can be provided in more than one way! Also, it takes a little getting used to before a person can quickly comprehend these quotes and take quick decisions based on the same. In this article, we will explain the two types of Forex quotations as well as the abbreviations which are used in them.
Any Foreign exchange market quotation always uses the abbreviation of the currency under question. There are standard currency keys or currency codes that have been created by the International Standards Organization (ISO). These keys are used for transactions worldwide.
The key is made up of 3 alphabets. The first two alphabets of the key denote the country to which the currency belongs whereas the third alphabet of the key is the first alphabet of the currency. Hence, the United States dollar is referred to as the USD, Indian Rupee is referred to as INR, Great Britain Pound is referred to as GBP and the Japanese Yen is abbreviated as JPY.
The exceptions to this rule would be currencies like Euro which is abbreviated as EUR and most importantly the Swiss Franc which is abbreviated as CHF.
- Meaning: Under this method, the quote is expressed in terms of domestic currency. This means that the rate expresses how one unit of domestic currency relates to foreign currency. Therefore, if a unit of the domestic currency were to be exchanged, how many units of the foreign currency would it beget? This method is also alternatively referred to as the price quotation method.Therefore, if the value of the domestic currency increases, a smaller amount of it would have to be exchanged. Conversely, a decline in value would create a situation where a large amount of the domestic currency would have to be exchanged. Hence, it can be said that the quotation rate has an inverse relationship with the value of the domestic currency.
The value of the domestic currency is assumed to be 1 in case of a direct quotation. The price being quoted explains the number of units of foreign currency that can be exchanged for a single unit of domestic currency.
- Example: An example of a direct quotation would beUSD/JPY: 143.15/18
This quote suggests that roughly 143 units of Japanese Yen can be exchanged for 1 unit of the United States Dollar. The two rates provided are bid and ask rates i.e. the different rates at which the market maker is willing to buy and sell the currency.
- Usage: The direct quote method is one of the most widely used quotation methods across the world. This is the norm for quoting Forex prices and is assumed de facto until another method has been explicitly mentioned.
- Meaning: This method is the opposite of the direct quotation method. Under this method, the quote is expressed in terms of foreign currency. Therefore this rate assumes one unit of foreign currency. It then expresses how many units of domestic currency are required to obtain a single unit of a foreign currency. Sometimes this quote is also expressed in terms of 100 units of foreign currency. This method is often referred to as the quantity quotation method.Since this method is quoted in terms of foreign currency, the quoted rate has a direct correlation with the domestic rate. If the quote goes up, so does the value of the domestic currency and vice versa.
- Example: An example of an indirect quotation would be:EUR/USD: 0.875/79
In this case, the first currency i.e. EUR is the domestic currency. Therefore, the indirect quote refers to approximately 0.875 EUR being exchanged for 1 unit of USD. Once again the two rates provided are the bid-ask rate i.e. the two different rates at which market makers are willing to buy and sell the currency.
- Usage: The usage of indirect currency quotation is extremely rare. It is only in the Commonwealth countries like United Kingdom and Australia that the indirect quotation method is used as a result of convention.
The Unique Case of the United States Dollar
By convention most quotations that involve the United States dollar provide a direct quote for the dollar. This is because most countries in the world are looking to buy the reserve currency of the world. Therefore any currency pair involving the United States Dollar will usually begin with USD/XXX where XXX denotes the variable counter currency.
Hence, even if a quote for INR and USD is received in India, it is written as USD/INR even though Indian Rupee is the domestic currency. It would not be incorrect to provide an INR/USD quote. However, that is not the Forex market convention.
A notable exception to the above rule would be the Euro and Dollar pair wherein Euro is still assumed to be the domestic currency.
Therefore any Forex quotation can be interpreted in different ways based on the type of quotation that is being provided, where it is being provided and various other market conventions and norms!