Economies
Indirect Quote and the Foreign Currency Perspective
Most mistakes in foreign exchange questions come from reading the quote incorrectly. An indirect quote looks familiar, but it flips the viewpoint. Once that shift is understood, the concept becomes straightforward.
For CFA and FRM candidates, the challenge is not calculation. It is perspective.
What an Indirect Quote Means
An indirect quote expresses the value of one unit of domestic currency in terms of foreign currency.
It answers the question:
How much foreign currency can one unit of local currency buy?
If you are based in India, an INR USD quote is an indirect quote.
If you are based in the United States, a USD EUR quote is an indirect quote.
The definition always depends on which currency is domestic.
Why Perspective Changes Interpretation
An indirect quote increases when the domestic currency strengthens.
One unit of domestic currency buys more foreign currency than before. That is the opposite interpretation of a direct quote.
Exams frequently test this inversion, especially in conceptual questions on appreciation and depreciation.
Relationship With Direct Quotes
Direct and indirect quotes are two ways of expressing the same exchange rate.
They are reciprocals of each other, but they are not interpreted the same way. A rising direct quote signals domestic weakness. A rising indirect quote signals domestic strength.
Failing to recognise this difference is one of the most common FX errors.
How Indirect Quotes Appear in Practice
Indirect quotes are often used in markets where the domestic currency is widely traded internationally.
They make it easier to see the purchasing power of the local currency in foreign terms. This is why some currencies are more commonly quoted indirectly in global markets.
Common Student Pitfalls
Students often:
- forget to identify the domestic currency
- apply direct quote logic to an indirect quote
- assume quote conventions are universal
These mistakes usually cost marks even when arithmetic is correct.
Final Perspective
An indirect quote frames exchange rates from the domestic currency’s purchasing power. Once that viewpoint is clear, currency movements make sense without memorisation. For exams, always ask which currency is domestic first. Interpretation follows naturally.
