Direct quotation, also known as price quotation or European convention, refers to referencing a domestic currency in units of a foreign currency to calculate the exchange rate. In other words, it tells us how many units of our domestic currency are needed to purchase one unit of foreign currency. This way, we always have a reference of one unit of another currency as a fixed part, and our domestic currency as the variable part.
For example, if we have a currency pair expressed as 0.694 EUR/USD. The domestic currency would be the euro (numerator) and the foreign currency would be the US dollar (denominator). It tells us that 0.694 euros are needed to purchase one dollar.
The counterpart of direct quotation is indirect quotation, also known as volume quotation or British system. In this case, it reflects the number of units of foreign currency needed to purchase one unit of domestic currency.
This method of quotation is used depending on what information we need. Direct quotation is more commonly used, but sometimes we need to know how many yen we can buy with one euro, or how many euros we need to buy one yen. In the forex market, it depends on whether the position is a buy or a sell. Direct quotation is useful for the buyer, as it tells them how many units of their domestic currency they need to buy one unit of foreign currency. Indirect quotation, on the other hand, is used for the seller, as it works in the opposite way.
Direct quotation also applies to the stock market, where it refers to a situation where shares are directly listed on the stock exchange without a previous public offering. This usually happens due to various factors such as the company not needing to increase its equity, a diversified shareholding, shareholders not wanting to lose control, or the presence of a majority shareholder who wants to divest.
As an example, let’s look at some currency pairs represented according to this exchange rate system as of November 2022. Remember that the foreign currency is the one expressed in one unit and the domestic currency is the one that varies.
19.50 Mexican pesos would buy one euro. The domestic currency is the peso, and the foreign currency is the euro.
1.22 Canadian dollars would buy one US dollar. The domestic currency is the Canadian dollar and the foreign currency is the US dollar.
85.40 Japanese yen would buy one US dollar. The domestic currency is the Japanese yen and the foreign currency is the US dollar.
