Direct Quote is one of the two methods used to define or express the foreign currency conversion rate with the domestic currency. It explains how many domestic currencies are needed to buy a single unit of foreign currency.
It describes the number of units of domestic currency required to get a certain amount of foreign currency. It is used in the foreign exchange market to show the ratio of one currency in relation to another. If the direct quote has a lower exchange rate, it means the domestic currency is stronger.
The direct quote method provides the base currency per quoted currency (i.e., foreign currency). This provides the cost of the local currency to purchase 1 unit of the foreign currency. The nature of the direct quote currency depends upon the location of the transaction concerned and the person concerned.
Foreign currency conversion rates could be expressed and presented in two ways, either by direct or indirect quotations. Indirect quotation method, the Foreign currency amount is fixed, and the domestic currency is variable depending upon the geographical location of where the transaction takes place.
The direct quote currency is usually simple and easy for the consumer to understand as it provides the amount of local money needed for the conversion into the required foreign currency. So in case the rate of conversion is lower, then it means that the value of the domestic currency is increasing in the market. In contrast, if the conversion rate is higher, the value of a domestic currency decreases in the market.
The formula to be used for a direct quote could be shown as follows:
The result will be the amount of domestic currency needed to convert into 1 unit of foreign currency. For example, in case the indirect quote is available, the following formula could be applied:
Direct Quote = 1/ Indirect Quote
Where indirect quote will be given as the amount of foreign currency required for the 1 unit of the domestic currency.
Let us look at some examples of citing a direct quote.
An Indian Company ABC Ltd. needed USD 1200 & it was provided that it will require to convert its INR 84000 for such purpose. Comment on the Direct quote for the company.
As ABC Ltd. is an Indian Company and its place of residence is in India, the direct quote will be in the form of "Domestic Currency (i.e., INR) needed for conversion of 1 unit of Foreign Currency (i.e., USD).
So, as per the formula, the quote would be;
So, this would be; INR 70 per USD at the time of conversion.
The quotation of the currency conversion rate can be presented in two methods. One is the direct quote exchange rate, and the other is the indirect method. Although the purpose of both methods is the same, the conceptuality behind them is different:
Direct Quote is the Amount of Domestic Currency divided by the amount of Foreign Currency. Therefore, a low exchange rate through Direct quotes signifies that the domestic currency is getting more potent in terms of the foreign currency and vice versa.
How are direct quotes used in currency trading?Direct quotes are used in currency trading. Traders and investors analyze direct quotes to determine the value of one currency relative to another. Therefore changes in these quotes can indicate shifts in currency valuations and are crucial for making informed trading decisions.
Where can one find direct quotes for currency exchange rates?Direct quotes for currency exchange rates can be obtained from financial institutions, online currency converters, financial news websites, and trading platforms. These sources provide real-time or delayed direct quotes for various currency pairs.
This article has been a guide to direct quotes & their definition. Here we discuss the formula to calculate direct quote examples and their use and benefits. You can learn more about from the following articles –
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