An exchange rate shows the price and ratio at which one currency can be exchanged for another currency. Exchange rates are generally shown in one of two formats: direct quotation and indirect quotation.
An exchange rate expressed as a direct quote would be show as: (local currency divided by one unit of foreign currency). Example: 1 euro = 1.25 Swiss francs. A direct quote shows how much local currency is required to purchase one unit of foreign currency.
The exchange rate, as expressed by an indirect quote, would be shown as: (foreign currency / one unit of local currency). Example: 1 Swiss franc = 0.8 euros. An indirect quote shows how much foreign currency is required to purchase one unit of local currency.
As you may notice, the exchange rate shown by a direct quote is the inverse value of the same exchange rate shown as an indirect quote and vice versa. The format used to display currency exchange rates varies between country, currencies and situations.
Direct quotes are more widely used in Switzerland and the United States while indirect quotes are more widely used in Germany and the United Kingdom.
Example 1:
Bank A in Germany and bank B in Switzerland both publish a EUR to CHF exchange rate as: 1 EUR = 1.25 CHF.
From the point of view of bank A in Germany, the number 1.25 indicates the relation between a foreign currency (CHF) and a single unit of local currency (EUR). In this case, bank A is using the indirect quotation format.
From the point of view of bank B in Switzerland, the number 1.25 indicates the relation between a local currency (CHF) and a single unit of foreign currency (EUR). In this case, bank B is using the direct quotation format.
To determine whether an exchange rate is shown as a direct quote or as an indirect quote, you must first determine which figure indicates the local currency and which one indicates the foreign currency.
Example 2:
Bank A in Germany and bank B in Switzerland both publish an exchange rate as 0.8 EUR = 1 CHF.
From the point of view of bank A in Germany, the number 0.8 indicates the relation between a local currency (EUR) and a foreign currency (CHF). In this case, bank A is using the direct quotation format.
From the point of view of bank B in Switzerland, the figure 0.8 indicates the relation between a foreign currency (EUR) and a local currency (CHF). In this case, bank B is using the indirect quotation format.
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