What is Direct Quote?
Direct Quote is one of the two methods used to define or express the foreign currency conversion rate with the domestic currency, where how many domestic currencies is needed to buy a single unit of foreign currency is expressed i.e., as of 27th February 2020, Rs. 72.2725 /- is needed to buy $1.
Explanation
- Foreign Currency Conversion rates could be expressed and presented in two ways, either by directly quotation method or Indirect quotation method. Indirect quotation method, the Foreign currency amount is fixed, and the domestic currency is variable depending upon the geographical location of where the transaction takes place.
- The direct method is usually simple and easy for the consumer to understand as it provides the amount of local currency needed for the conversion into the required foreign currency. So in case the rate of conversion is lower, then it means that the value of the domestic currency is increasing in the market, whereas in case the rate of conversion is higher than, it means that the value of a domestic currency is in decreasing side of the market.
Formula
The formula to be used for Direct Quote could be shown as follows:
The result will come out to be the amount of domestic currency needed to convert into 1 unit of foreign currency. In case the indirect quote is available, the following formula could be applied:
Where indirect quote will be given as the amount of foreign currency required for the 1 unit of the domestic currency.
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Examples of Direct Quote
Example: An Indian Company ABC Ltd. needed USD 1200 & it was provided that it will require to convert its INR 84000 for such purpose. Comment on the Direct quote for the company.
Solution: As ABC Ltd. is an Indian Company and its place of residence is in India, the direct quote will be in the form of “Domestic Currency (i.e., INR) needed for conversion of 1 unit of Foreign Currency (i.e., USD).
So, as per the formula, the quote would be;
- = Domestic Currency (INR) / Foreign Currency (USD)
- = 84000 / 1200
- = 70
So, this would be; INR 70 per USD at the time of conversion.
How is it Used?
- Direct quotes are often the majorly used way to communicate or present the rate of foreign currency change. But the most often usage of this method is when the base currency has more value in comparison to the counter currency in the market.
- To understand this point, let’s take an example. Let’s say, at a point of time, the Indian Currency (INR) needed 72 units to purchase 1 unit of USD.
- In this case, the statement will be treated as a direct quote as foreign currency (USD) is of the fixed unit with the variable domestic currency (INR). In this scenario, the base currency is USD, which carries more value in the market comparing to the counter currency, which is INR.
Direct Quote and Indirect Quote
The quotation of the rate of currency conversion can be presented in two methods. One is the Direct quotation, and the other one is the Indirect Method. Although the purpose of both the method is the same, the conceptuality behind them is different:
- The quote of the rate of conversion of foreign currency is considered direct when the value or price of one unit of foreign currency is presented in the value or price of the domestic currency. However, the quote will be considered indirect when the value or price of one unit of domestic currency is presented in the value or price of the foreign currency.
- The quotation of the currency exchange rate depends on the geographical area or location of the person concerned or the location of the transaction concerned. In the case of a direct quote, how many domestic currencies needed to buy 1 unit of any other foreign currency is expressed. However, in the case of indirect quotations, how many foreign currencies needed to exchange 1 unit of domestic currency is expressed.
- In the case of direct quotation, if the rate declines, then that means that value of the domestic currency increases. Whereas, in the case of indirect quotation, if the rate decreases, then that means that the value of the domestic currency decreases.
Benefits
- The direct quotation method provides a simple cost that how much will be the domestic currency needed to buy one unit of foreign currency. This statement is easily understandable for the public in general.
- A direct quotation helps in easily evaluating the value of the domestic currency for the public in comparison to the other foreign currencies.
- The direct quotation also helps the general public to understand which country’s currency has more value in the market compared to their domestic currency.
- The decrease in rate mentioned in the direct quote provides that the market of the domestic currency is performing better, and its value is increasing in comparison to the other foreign currencies, which shows the growth in the economy of the domestic country.
Conclusion
- The Direct quotation method provides the base currency per unit of the quoted currency (i.e., foreign currency). This provides the cost of the local currency to be used to purchase the 1 unit of the foreign currency. The nature of the quotation depends upon the location of the transaction concerned and the person concerned.
- For example, if the person is in the US, then the domestic currency will become USD & any other currency will be considered as Foreign currency (counter currency). In the case of a direct quote, the foreign currency is considered as the base currency, and the other foreign currency is considered as the counter currency.
- The majority of the stockbrokers dealing in currency trading show the comparison of the rate of exchange in the currency indirect method, as it is easily understood by the general public, and it makes it easier for the people to compare the currencies for their trading purpose.
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