Foreign Exchange

[kansal7mba]

How do we interpret USD/EUR = 1.25? Is it $1 = EUR 1.25 or EUR 1 = $ 1.25?

General market convention is like USD/INR = 65 means $1 = INR 65.

Lot of FX questions are expected on Part 1 exam.

 

[rajivpro]

Hi @kansal7mba,

The notation used by you in the above example will be read as "1 USD can be exchanged for 1.25 EUR ". The currency that comes first is known as the "Base Currency" and the second one or the one that is used as the reference is known as the "Quoted Currency". The currencies can also be split into "Direct Quote" and "Indirect Quote". As per your example, for an American a direct quote would mean the domestic currency (USD) will be the base currency. Conversely, an indirect quote is the one where the foreign currency is the base currency and the domestic currency is the quoted currency.

Marking @Nicole Seaman and @David Harper CFA FRM to decide if they want to move this post to a more generic query.

Thanks,
Rajiv

 

[kansal7mba]

Thanks Rajiv. Here is what I understand of Direct and Indirect quotes.

A direct quote is a foreign exchange rate quoted as the domestic currency per unit of the foreign currency.
It involves a quote in fixed units of foreign currency against variable amounts of the domestic currency.
A direct quote of the U.S. dollar against the Canadian dollar in the United States would be U.S. $0.7858 = C $1 while in Canada, a direct quote for would be C $1.2725 = U.S. $1.