Indirect Quote Key Forex Term Explained with Examples Tips

Core Description

• An indirect quote expresses how many units of foreign currency are needed to obtain one unit of your domestic currency, with the domestic currency as the base.
• Indirect quotes are widely used across travel, trade, hedging, accounting, and investment, requiring clear understanding of base/counter roles and accurate conversion from direct quotes.
• Practical use of indirect quotes spans retail, corporate, and financial markets, where precision in application and convention is essential to avoid costly errors.

Definition and Background

An indirect quote in foreign exchange states the amount of foreign currency required to buy one unit of the domestic currency. In this format, the domestic currency takes the role of the base currency and the foreign currency is the counter or quote currency. For example, a U.S. resident seeing a EUR/USD quote displayed as "0.92 EUR per USD" means 1 USD buys 0.92 EUR — the classic indirect quote scenario for an American observer.

Historical Context

Indirect quoting dates back to merchant-ledger practices in global commerce hubs centuries ago, where expressing the value of home currency relative to foreign units facilitated both trade settlement and domestic accounting. Over time, conventions solidified — for instance, cable dealers in London quoting USD per GBP (an indirect quote for the British user), or New York banks quoting GBP per USD.

As financial markets evolved toward screen trading and internationalization, standardized base/counter conventions developed, reinforced by systems like ISO 4217 currency codes. Regional preferences, such as the European "foreign per USD" style, further shaped today's quoting standards.

When and Why Used

Indirect quotes are especially helpful for anyone wanting to express foreign value in home-currency terms — travelers making price comparisons abroad, businesses invoicing in their local currency, corporate finance teams aligning financial reports, and investors or portfolio managers assessing currency risk exposures. Regulatory and accounting guidance often follows the indirect quote principle to support correct translation of foreign operations back into a company’s functional currency.

Calculation Methods and Applications

Understanding how to compute and apply indirect quotes is essential for effective investment, financial planning, and risk management.

General Calculation

The mathematical form is simple:

• Let D = domestic currency, F = foreign currency
• Indirect quote (q): F per 1 D
• Direct quote (p): D per 1 F
• They are reciprocals: q = 1/p

Converting direct to indirect:

If the direct quote for EUR/USD is 1.0800 (USD per 1 EUR), then the indirect quote for a U.S. resident is USD/EUR = 1/1.0800 ≈ 0.9259 (EUR per USD).

Bid-Ask Spread

Dealers quote slightly different prices for buying and selling (the bid and ask). Inverting a quote requires flipping these:

• For EUR/USD bid-ask: 1.0810/1.0820 (USD per 1 EUR)
• Inverse, USD/EUR: 1/1.0820 = 0.9242 (bid), 1/1.0810 = 0.9249 (ask)

Cross-Rate Calculations

With indirect quotes aligned to the same domestic currency, cross rates are straightforward ratios.Example:A UK treasurer sees USD 1.27 per GBP and JPY 185 per GBP.Compute USD/JPY: 185 ÷ 1.27 ≈ 145.67 JPY per USD.

Application Scenarios

• Traveler: Compares EUR per USD when using cards or cash in Europe, ensuring optimal exchange.
• Corporate Treasurer: Prices exports in home currency and uses indirect quotes to estimate receipts, design hedging strategies, or simplify board reports.
• Portfolio Manager: Calculates foreign asset hedges and currency-adjusted returns.

Comparison, Advantages, and Common Misconceptions

Core Differences: Indirect vs. Direct Quote

Advantages

• Home-Centric: Changes in quote directly reflect purchasing power of the domestic currency.
• Budgeting/Auditing: Directly maps to home-currency-focused reports and control systems.
• Ease of Multicurrency Comparison: Travelers, consumers, and corporates can instantly compare costs abroad.

Disadvantages

• Market Confusion: Market screens do not always default to indirect quote, requiring conversion.
• Rounding/Inversion Errors: Manual calculation may lead to imprecision, especially for large invoices.
• Convention Mix-Ups: Not all markets follow the same quote order; misunderstanding base/counter leads to wrong reporting or hedge sizing.

Common Misconceptions

Mixing Base and Counter Roles:
Assuming the counter currency is the domestic one can lead to pricing and hedge mistakes.

Bid-Ask Spread Confusion:
Many invert the mid-point, ignoring proper spread adjustment. Each bid/ask must be inverted and swapped for accuracy.

Direction of Quote Movement:
A rise in an indirect quote signals a stronger domestic currency; this is opposite of direct quote logic.

Not Uniform Across Pairs:
EUR/USD and USD/JPY conventions differ; always check which currency is base in dealer or platform quotes.

Practical Guide

Clarifying Your Domestic Currency

Set a clear domestic currency for each entity or personal account. This ensures indirect quotes (FC per 1 DC) are interpreted and applied correctly across trading, pricing, and internal controls.

Interpreting Quotations and Bid-Ask

• Indirect quote: The bid is what the dealer offers to buy your domestic currency, the ask is what you must pay to purchase your home currency.
• Tip: Use the mid-rate for valuation purposes but trade or settle on actual bid/ask for accuracy.

Accurate Conversion Methods

Always invert the direct quote, flipping bid and ask positions. Use sufficient decimal precision to avoid rounding errors, especially in high-volume FX transactions.

Cross Rates

When calculating cross rates, align all quotes so that the domestic currency is consistent. For mixed conventions, invert as needed before calculation.

Cost Comparisons

Execution costs encompass more than just the quoted spread: consider commission, custody, and settlement fees, all expressed in FC per 1 DC for consistency.

Sizing and Execution

Calculate flows in notional foreign currency directly from the indirect quote: Notional FC = (FC per 1 DC) × DC amount. Apply limit orders and monitor large transactions for slippage, using time-stamped quotes for reconciliation.

Hedging and Accounting

Map exposures in domestic terms; size hedges using instruments quoted indirectly, matching tenors to cash flow needs, and reconciling to your accounting policy’s specified rate source.

Avoiding Pitfalls

• Do not mix direct and indirect quotes in one statement or ledger.
• Do not invert only the mid-point; always invert bid/ask separately.
• Use sufficient digits; finalize rounding only at the reporting or payment stage.

Case Study: Corporate Hedging (Virtual Example)

A U.K.-based manufacturing firm regularly exports to Canada. Revenue is received in GBP, but the Canadian sales office frequently reviews CAD per GBP indirect quotes.

Scenario:Last quarter, average CAD/GBP (indirect) quote was 1.70. The treasurer sizes a forward hedge for GBP 500,000 in expected receipts.

• Estimated hedge size: CAD 1.70 × GBP 500,000 = CAD 850,000.

By tracking daily indirect quotes and locking in forwards consistently, the treasurer aligns budgeting, hedge effectiveness, and board reporting entirely in sterling terms — minimizing confusion and basis risk. This example is illustrative and not investment advice.

Resources for Learning and Improvement

• Core Textbooks:

  • Multinational Financial Management by Shapiro
  • International Financial Management by Madura
  • International Financial Markets by Levich

• Academic Journals:

  • Journal of International Money and Finance
  • Journal of Financial Economics (FX microstructure, price discovery)

• Official Guidance:

  • Bank for International Settlements (BIS) FX Global Code
  • European Central Bank (ECB) and Federal Reserve FX primers
  • International Monetary Fund (IMF) Balance of Payments Manual

• Online Courses and MOOCs:

  • FX and currency risk management courses on Coursera, edX
  • BIS Academy, ECB education videos

• Professional Exam Materials:

  • CFA Program (all levels), especially on FX risk
  • GARP’s FRM curriculum (currency conventions, hedging, direct/indirect conversion)

• Data and Analytics Providers:

  • Bloomberg, Refinitiv, CME real-time feeds
  • OANDA, FRED historical FX series

• Glossaries and Standards:

  • BIS glossaries, ISO 4217 for currency codes
  • Reuters, Bloomberg notation manuals

• Broker/Education Hubs:

  • Platform-specific primers (e.g., Longbridge)
  • Multi-currency learning portals with calculators, notation guides

FAQs

What is an indirect quote?

An indirect quote tells you how many units of a foreign currency equal one unit of your domestic currency. Your currency is the base, and the foreign currency is the counter. For example, if USD/JPY = 150, it means 1 USD buys 150 Japanese yen.

How does it differ from a direct quote?

A direct quote shows the price of one unit of foreign currency in local terms. An indirect quote reverses this: foreign currency per unit of domestic currency. They are mathematical reciprocals.

Which currency is base and which is counter in an indirect quote?

In an indirect quote, the domestic currency is always the base and the foreign currency is the counter. For GBP/CHF = 1.12, GBP is the base, CHF is the counter.

How do bid–ask spreads work in indirect quotes?

Bid and ask refer to the dealer’s price for the base (domestic) currency. Bid is what the dealer pays you for one unit of your home currency; ask is what they charge you. Inversion reverses the sides — attention to detail is essential.

What happens to an indirect quote when the domestic currency appreciates?

A rising indirect quote means your domestic currency is strengthening; it buys more of the foreign currency per unit.

How do I convert between direct and indirect quotes?

Take the reciprocal. For precision with spreads, invert bid and ask separately: new bid = 1/old ask; new ask = 1/old bid.

How do forward indirect quotes work?

Forward indirect quotes adjust the spot rate by adding or subtracting "forward points," based on relative interest rates. The convention (domestic as base) remains, but the outright rate reflects time-adjusted value.

How do I compute cross rates using indirect quotes?

Align all quotes with respect to the domestic currency first. To get a cross rate, divide one paired indirect quote by another, maintaining bid/ask consistency.

Conclusion

Understanding indirect quotes is essential for professionals and individuals dealing with foreign currencies — whether for travel, trade, investment, or risk management. The indirect quote centers the domestic currency, enabling direct comparison of foreign amounts to home units. Proficiency with this convention, alongside careful handling of conversion, bid/ask spreads, and cross-currency rates, reduces the risk of errors and supports effective budgeting, reporting, and hedging. By making use of recommended resources, practicing with realistic scenarios, and maintaining vigilance about conventions and calculation methods, both beginners and advanced users can manage the complexities of indirect quotes in global finance with greater confidence.