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Stock Market Operations

Notes 14.2 Reading a Quote and Understanding the Jargon

One of the biggest sources of confusion for those new to the currency market is the standard for
quoting currencies. In this section, we’ll go over currency quotations and how they work in
currency pair trades.

14.2.1 Reading a Quote

When a currency is quoted, it is done in relation to another currency, so that the value of one is
reflected through the value of another. Therefore, if you are trying to determine the exchange
rate between the U.S. dollar (USD) and the Japanese yen (JPY), the quote would look like this:
USD/JPY = 119.50

This is referred to as a currency pair. The currency to the left of the slash is the base currency,
while the currency on the right is called the quote or counter currency. The base currency (in this
case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in
this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The
quote means that US$1 = 119.50 Japanese yen. In other words, US$1 can buy 119.50 Japanese yen.
Direct Quote vs. Indirect Quote

There are two ways to quote a currency pair, either directly or indirectly. A direct quote is
simply a currency pair in which the domestic currency is the base currency; while an indirect
quote, is a currency pair where the domestic currency is the quoted currency. So if you were
looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency,
a direct quote would be CAD/USD, while an indirect quote would be USD/CAD. The direct
quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one
unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign
currency is fixed at one unit.
For example, if Canada is the domestic currency, a direct quote would be 0.85 CAD/USD, which
means with C$1, you can purchase US$0.85. The indirect quote for this would be the inverse
(1/0.85), which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18.

In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is
frequently the base currency in the currency pair. In these cases, it is called a direct quote. This
would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50
Japanese yen.
However, not all currencies have the U.S. dollar as the base. The Queen’s currencies - those
currencies that historically have had a tie with Britain, such as the British pound, Australian
Dollar and New Zealand dollar – are all quoted as the base currency against the U.S. dollar. The
euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the
counter currency, and the exchange rate is referred to as an indirect quote. This is why the EUR/
USD quote is given as 1.25, for example, because it means that one euro is the equivalent of
1.25 U.S. dollars.

Most currency exchange rates are quoted out to four digits after the decimal place, with the
exception of the Japanese yen (JPY), which is quoted out to two decimal places.

Cross Currency

When a currency quote is given without the U.S. dollar as one of its components, this is called a
cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and

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