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The foreign exchange quotations, meaning the way relative prices or rates are quoted fo trade between players in the foreign exchange markets.
Foreign exchange quotations can be three types, they are:
- Direct Quotation
- Indirect Quotation and
- Cross rates
Direct quotation is the price of one unit of a foreign currency quoted in terms of the home country’s currency. In other words, it is the home currency that would cost you to purchase one unit of the foreign currency.
For instance, a quotation of Rs. 65.69 per dollar in New Delhi is a direct quotation for the rupee. This is also known as a quotation in European terms.
The indirect quotation is just the reverse of direct quotation. It is the price of one unit of the home country’s currency quoted i terms of foreign currency. In other words, it is the home currency that would cost you to purchase one unit of the foreign currency.
For example, a quotation of $0.0152 per rupee is an indirect quotation for the rupee. You will notice here that the direct and indirect quotations are reciprocal of each other.
In other words, the direct quotation is equal to one divided by the indirect quotation. This is also known as a quotation in American terms.
Although banks deal with non-bank customers in any convertible currency, for a French franc/Italian lira, Sterling/Spanish pesta, Swiss franc/French francs and so on, the inter bank market normally quotes currencies against the US dollars, This avoids the trouble of having to quote many individual rates between currencies. The exchange rate for any non-dollar currencies is then calculated from their respective dollar exchange rates, to derive a cross rate. For example, the Swiss Franc/French fanc exchange rate can be derived from Swiss franc/dollar and dollar/French franc rates. Cross rates are the rates between two currencies where neither one is the US dollar.