Methods of Quoting Foreign Exchange Rates

Currently, domestic banks determine exchange rates by referencing international financial markets, typically using two quotation methods: direct quotation and indirect quotation.

Direct Quotation:
Direct quotation, also known as price quotation, expresses the exchange rate in terms of the domestic currency per unit of foreign currency. Generally, it shows how much domestic currency is needed to exchange for 1 or 100 units of foreign currency. The stronger the domestic currency, the less domestic currency a unit of foreign currency can buy, resulting in a lower exchange rate. Conversely, the weaker the domestic currency, the more domestic currency a unit of foreign currency can buy, leading to a higher exchange rate.

Under direct quotation, the rise and fall of the exchange rate are inversely proportional to changes in the domestic currency's value:

• If the domestic currency appreciates, the exchange rate falls.

• If the domestic currency depreciates, the exchange rate rises.

Most countries adopt direct quotation, and most market exchange rates are quoted this way, such as USD/JPY, USD/HKD, and USD/CNY.

Indirect Quotation:
Indirect quotation, also known as quantity quotation, expresses the exchange rate in terms of foreign currency per unit of domestic currency. Generally, it shows how much foreign currency can be exchanged for 1 or 100 units of domestic currency. The stronger the domestic currency, the more foreign currency a unit of domestic currency can buy, resulting in a higher exchange rate. Conversely, the weaker the domestic currency, the less foreign currency a unit of domestic currency can buy, leading to a lower exchange rate.

Under indirect quotation, the rise and fall of the exchange rate are directly proportional to changes in the domestic currency's value:

• If the domestic currency appreciates, the exchange rate rises.

• If the domestic currency depreciates, the exchange rate falls.

Former Commonwealth countries often use indirect quotation, such as the UK, Australia, and New Zealand. Major exchange rates using indirect quotation include GBP/USD and AUD/USD.

Quotation Examples:

• Direct Quotation: USD/JPY = 134.56/61, USD/HKD = 7.7940/50, USD/CHF = 1.6840/45.

• Indirect Quotation: EUR/USD = 0.8750/55, GBP/USD = 1.4143/50, AUD/USD = 0.5102/09.

The quotation method has two meanings:

1. Currency A/Currency B: Indicates how much Currency B is exchanged for 1 unit of Currency A.

2. Bid/Ask Price (A/B): Represents the buying and selling prices quoted by the dealer. Since the difference between the bid and ask prices is small, the ask price often only displays the last two digits, with the first digits matching the bid price.

The Meaning of "Pip" (Basis Point) in Forex Rates
By market convention, forex rates are typically quoted with five significant digits. Counting from right to left:

• The first digit is called "X pips," the smallest unit of exchange rate movement.

• The second digit is called "X tens of pips," and so on.

Examples:

• 1 EUR = 1.1011 USD; 1 USD = 120.55 JPY.

• If EUR/USD moves from 1.1010 to 1.1015, it is said that the euro has risen by 5 pips against the dollar.

• If USD/JPY moves from 120.50 to 120.00, it is said that the dollar has fallen by 50 pips against the yen.