Direct Quote
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.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.
Definition: Direct quotation refers to the exchange rate quoted in terms of a fixed amount of foreign currency, expressed in a variable amount of domestic currency. In other words, a direct exchange rate asks how much domestic currency is needed to purchase one unit of foreign currency, most commonly the US dollar (USD) in the forex market. In a direct quotation, the foreign currency is the base currency, and the domestic currency is the quote currency. This contrasts with indirect quotation, where the domestic currency price is expressed in foreign currency, or the amount of domestic currency received for selling one unit of foreign currency. Note that quotations involving two foreign currencies (or foreign currencies not involving the USD) are called cross rates.
Origin: The concept of direct quotation originated with the development of the international forex market. As global trade and financial markets expanded, countries needed a standardized way to represent the exchange relationships between different currencies. The use of direct quotations made transactions more transparent and convenient, especially in the context of the USD being the primary global reserve currency.
Categories and Characteristics: Direct quotations are mainly divided into two categories: bid price and ask price. The bid price is the price at which banks or forex dealers are willing to buy foreign currency, while the ask price is the price at which they are willing to sell foreign currency. Characteristics of direct quotations include: 1. High transparency and easy to understand; 2. Suitable for most international trade and investment activities; 3. Highly influenced by market supply and demand.
Specific Cases: Case 1: Suppose the current direct quotation for USD to CNY is 1 USD = 7.00 CNY. This means that purchasing 1 USD requires 7 CNY. If you are a Chinese tourist planning to travel to the United States, you need to exchange RMB for USD. According to this exchange rate, you need to pay 700 CNY to exchange for 100 USD. Case 2: Suppose a company needs to import a batch of equipment from the United States, valued at 10,000 USD. According to the current direct quotation of 1 USD = 7.00 CNY, the company needs to pay 70,000 CNY to complete this transaction.
Common Questions: 1. Why is direct quotation more common in the forex market? Direct quotation provides a straightforward way to represent currency exchange relationships, especially with the USD being the primary global reserve currency. 2. What is the difference between direct and indirect quotation? Direct quotation is the exchange rate quoted in terms of a fixed amount of foreign currency, while indirect quotation is the exchange rate quoted in terms of the domestic currency.
