Page 47 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes In practice, foreign exchange quotations for currencies generally follow two conventions. The
two methods are referred to as the Direct (American) and Indirect (European) methods of
quotation.

Direct/American Quotation

The most common way of stating a foreign exchange quotation is in terms of the number of
units of home Currency needed to buy one unit of foreign Currency. This is known as the Direct
Quote. Direct Quotations are also known as American quotes. The prices of Currency Futures
Contracts traded on the Chicago Mercantile Exchange are quoted using the Direct method.
Direct exchange rate quotations are most frequently used by banks in dealing with their non-bank
customers.
Direct quotation: 1 foreign Currency unit = x home Currency units

India quotes its exchange rates in terms of the amount of rupees that can be exchanged for one
unit of foreign Currency. For example, if the Indian rupee is the home Currency and the foreign
Currency is the dollar, then the exchange rate between the rupee and the dollar might be stated
as:
$ 1/` 49.6100

This means that for one Dollar, one can buy 49.6100 Rupees.
If the home Currency is dollar, a Direct quotation of the exchange rate between dollar and the
Euro is:

1.0/$1.32421,
indicating that the dollar cost of one Euro is $1.32421.

Indirect/European Quotation

Indirect quotations refer to the Price of foreign Currency in terms of one unit of home Currency.
In this method, also known as the European Terms, the rate is quoted in terms of the number of
units of the foreign Currency for one unit of the domestic Currency.
Indirect quotation: 1 home Currency unit = x foreign Currency units
For example, an Indirect quotation, for the exchange rate between the dollar and the rupee will
be ` 1/$.0201572/, indicating that one rupee can purchase .0202572 dollars.

!
Caution Both Direct and Indirect quotes are in use. In the US, it is common to use the
Direct Quote for domestic business. For international business, banks generally use
European Terms.

Short Dated and Broken Date Contracts

‘Short dated’ and ‘broken date’ contracts are terms used in foreign exchange trading and
Euromarket in connection with the delivery of Currency.
Foreign exchange contracts are normally based on standard quoted periods, such as one, two or
three months forward. If the foreign exchange trading takes place on a nonstandard date; for
example 25 days instead of 30 days or 47 days instead of 60 days it would be termed a ‘broken
date’ contract.

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