Exchange rate quotations can be quoted in two ways; Direct quotation and Indirect quotation.
A direct quote is a foreign exchange rate quoted in fixed units of foreign currency in variable amounts of the domestic currency. In other words, a direct currency quote asks what amount of domestic currency is needed to buy one unit of the foreign currency most commonly the U.S. dollar (USD) in forex markets. In a direct quote, the foreign currency is the base currency, while the domestic currency is the counter currency or quote currency.
In other words, a direct quote depicts the amount of foreign currency that can be bought for a certain unit of the domestic currency. The exact opposite of the direct quote is known as the indirect quote.
This can be contrasted with an indirect quote, in which the price of the domestic currency is expressed in terms of a foreign currency, or what is the amount of domestic currency received when one unit of the foreign currency is sold. Note that a quote involving two foreign currencies (or one not involving USD) is called a cross currency quote.
The use of direct quotes versus indirect quotes depends on the location of the trader asking for the quote, as that determines which currency in the pair is domestic and which is foreign. Non-business publications and other media usually quote foreign exchange rates in direct terms for the ease of consumers. However, the foreign exchange market has quoting conventions that transcend local borders.
A direct quote can be compared to an indirect quote as its inverse, or by the following expression:
DQ = 1/IQ
DQ = Direct Quote
IQ = Indirect Quote
The term indirect quote is a currency quotation in the foreign exchange market that expresses the variable amount of foreign currency required to buy or sell one unit of the domestic currency. An indirect quote is also known as a “quantity quotation,” since it expresses the quantity of foreign currency required to buy units of the domestic currency. In other words, the domestic currency is the base currency in an indirect quote, while the foreign currency is the counter currency.
The quote is indirect when the price of one unit of domestic currency is expressed in terms of foreign currency.
Since the US dollar (USD) is the most dominant currency, usually, the exchange rates are expressed against the US dollar. However, the exchange rates can also be quoted against other countries’ currencies, which is called as cross currency.
Now, a lower exchange rate in a direct quote implies that the domestic currency is appreciating in value. Whereas, a lower exchange rate in an indirect quote indicates that the domestic currency is depreciating in value as it is worth a smaller amount of foreign currency.
In a case where the foreign exchange is on the basis of the bid and ask spread, one can find the indirect quotation by taking an inverse of both the prices and then switching their places. The direct ask would be the indirect bid and the direct bid would now be the indirect ask.
So, if a direct quote is (a – b), then the indirect quote would be (1/b − 1/a).
Two way Quotation
A two-way (or two-sided) quote indicates both the current bid price and the current ask price of a security during a trading day on an exchange. To a trader, a two-way quote is more informative than the usual last-trade quote, which indicates only the price at which the security last traded.
A two-way quote involves a bid-ask spread, or the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept. An individual looking to sell will receive the bid price while one looking to buy will pay the ask price.
Two-way quotes can be contrasted with one-way quotes, which provide only the bid side or the ask side.
A quote is the price at which an asset can be traded; it may also refer to the most recent price that a buyer and seller agreed upon and at which some amount of the asset was transacted. A two-way quote tells traders the current price at which they can buy or sell a security. Moreover, the difference between the two indicates the spread or the difference between the bid and the ask, giving traders an idea of the current liquidity in the security.
A smaller spread indicates greater liquidity. There are enough shares available at that moment to meet demand, causing a narrowing of the gap between the bid and ask.
Two-way price quotations are often conveyed as $X/$Y when written, or “$X bid at $Y” when spoken.