Understanding Currency Values
You must have seen that a currency value is never specified for a single currency. It is in fact, specified in relation to another currency. Hence, it always known as a currency pair. Let us take as an example, the currency pair USD/CAD. The currency to the left of the slash(i.e. USD in this example) is the base currency, while the currency on the right of the slash(i.e. CAD in this example) is called the quote or counter currency. The value of the index USD/CAD defines how many units of Canadian dollar can 1 US dollar buy. A value of USD/CAD = 1.1470 tells us that 1 US dollar can buy 1.1470 Canadian dollars.
Direct Currency Quote & Indirect Currency Quote
Take the currency pair USD/CAD as an example. Suppose, our domestic currency is Canadian dollar. In this case, CAD/USD will be the direct currency quote and USD/CAD will be the indirect currency quote.
Hence, direct currency quote can be defined as the one in which domestic currency is the base currency and indirect currency quote can be defined as the one in which domestic currency is the foreign currency. In direct quote, foreign currency varies and domestic currency remains fixed at one unit. In indirect quote, the domestic currency is variable and the foreign currency is fixed at one unit.
Let's take the above example of indirect quote, USD/CAD = 1.1470 where Canadian dollar is domestic currency. In this case, 1 US dollar is equivalent to 1.1470 Canadian dollars. On the other hand, direct quote CAD/USD will be (1/1.1470) i.e. 0.8718.
Note: Mostly the index values are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.
|