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Price Quote Understanding in Forex Trading Market

 Price Quote

When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the (EUR)  and  the  U.S. dollar, the Price quote would look like this: EUR/USD= 1.4036. This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the EUR) is always equal to one unit (in this case, 1 EUR), and the quoted currency (in this case, the USD) is what that one base unit is equivalent to in the other currency. The price  means that 1 EUR = $ 1.4036. In other words, EUR 1 can buy $ 1.4036.

 

Direct Price Quote vs. Indirect Price Quote

Forex Price Quote

Forex Price Quote

There are two ways to price  in a currency pair, either directly or indirectly. A direct price quote or currency quote is simply a currency pair in which the domestic currency is the base currency  while an indirect price quote or quote, is a currency pair where the domestic currency is the quoted currency. So if you are looking at the EURO as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be EUR/USD, while an indirect quote would be USD/EUR. The direct quote varies the foreign currency and  domestic currency, remains fixed at one unit.

 

In the indirect price quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit. For example, if EURO is the domestic currency, a direct price quote would be 1.4036 EUR/USD, which means with EUR 1, you can purchase US$1.4036. The indirect price  for this would be the inverse (1/1.4036), which is 0.712 USD/EUR and means that USD$1 will purchase £ 0.712.

 

In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct price. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.53 Japanese yen. However, not all currencies have the U.S. dollar as the base.

 

Those  currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar – are all quoted as the base currency against the U.S. dollar. The euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect price  quote. This is why the EUR/USD quote is given as 1.4036 for example, because it means that one euro is the equivalent of 1.4036 U.S. dollars.

About Muhammad Shahid Memon

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