Foreign Exchange Rate and Exchange Quotations- Exchange rate quotations can be quoted in two ways – Direct quotation and Indirect quotation. A direct quotation is when one unit of foreign currency is expressed in terms of the domestic currency. Similarly, the indirect quotation is when one unit of domestic currency is expressed in terms of foreign currency. Any Foreign exchange market quotation always uses the abbreviation of the currency under question. There are standard currency keys or currency codes that have been created by the International Standards Organization (ISO). These keys are used for transactions worldwide.
The foreign exchange rates govern the rate at which one currency can be exchanged for another. An ‘exchange rate’ may be defined as the amount of currency that one requires to buy one unit of another currency or is the amount of currency one receives when selling one unit of another currency. It is the number of home currency units that one pays or receives per unit of foreign currency bought or sold.
Quotes are always given in pairs because a dealer would not know whether a prospective customer wants to buy or sell a foreign currency. The first-rate is the buy and the second is the sell or ask or offer rate. The rate at which the bank will buy a currency from the customer is called the bid rate and the rate at which the bank will sell a currency to the customer is the asking rate. The difference between the buying and selling rates is called the ‘spread’.
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