As a cooperative professor of International Financial Management, I find many of my students initially confused by the indirect and direct quotes of foreign exchange. It does not help that most textbooks introduce this very practical concept in theoretical examples that contribute to the bewilderment, and others get the formulas incorrect.
The idea itself is straightforward.
Exchange Rates can be written in two ways. Travelers are probably already familiar with this concept when they venture their money back and forth between currencies.
- Chinese Renminbi, aka Chinese Yuan (RMB or CNY)
- Korean Won (KRW)
- American Dollar (USD)
**In the examples below, we will assume you are a Chinese citizen
As of today, 1RMB = 171.49KRW. This means that if I go to the international foreign exchange trader and give them 1RMB, they will theoretically give me 171.49KRW in return (barring fees).
We would thus say the value of 1RMB = 171.49KRW.
But we could also say the reciprocal is also true — the value of 1KRW = 0.0058RMB.
The Direct Quote = (Domestic Currency / Foreign Currency).
The Chinese citizen would say a direct quote was: 1RMB / 171.49KRW = 0.0058RMB per KRW.
This is useful for domestic citizens trying to translate foreign currencies into their own.
Let’s say a Chinese tourist goes to South Korea and wants to buy a beautiful vase for 2,000,000KRW. But he isn’t sure what that means in his Chinese money from home. He can multipl7 2,000,000KRW by 0.0058 to find the Chinese value (11,600RMB).
Direct Quotes are also sometimes called the American terms.
The Indirect Quote = (Foreign Currency / Domestic Currency)
The Chinese citizen would say an indirect quote was: 171.49KRW / 1RMB = 171.49KRW per RMB
This is useful for domestic citizens trying to translate their currency into someone else’s or for foreigners trying to understand Chinese value.
Let’s say a Chinese tourist goes to South Korea. He knows that he has 500,000RMB at home to spend on his trip, but he is not sure what that means in Korean money. He can multiply 500,000RMB by 171.49 to find the Korean value (85,745,000KRW).
Indirect Quotes are also sometimes called the European terms.
The Korean Perspective
It is important to remember that Koreans would see the situation differently because they are from the other perspective.
Korea’s Direct Quote: (DC/FC)
171.49KRW/1RMB = 171.49KRW per RMB
Korea’s Indirect Quote: (FC/DC)
1RMB/171.49KRW = 0.0058RMB per KRW.