Currency quotes show the relationship between two currencies. Specifically, they are prices of currencies and are expressed in two different ways, depending on the trader’s perspective:

1. Direct Quote: expresses the price of a foreign currency in terms of a country’s domestic currency.
2. Indirect Quote: expresses the price of the domestic currency in terms of the foreign currency.
 

Conceptually, direct and indirect quotes are two ways of looking at the same exchange rate between currencies:

1. Direct quote = Domestic currency per one unit of foreign currency
2. Indirect quote = Foreign currency per one unit of domestic currency
 

For example, if we define the United States dollar as the domestic currency and the British pound as the foreign currency, then the quote $2.00/£ pound is a direct quote in the United States for the pound. It expresses the pound in terms of the dollar.
The same quote would be an indirect quote in Britain for the pound. Taking the inverse, £.50 pound/$ now becomes a direct quote for the dollar in Britain and an indirect quote for the dollar in the United States.

By necessity, the over-the-counter (OTC) market does not adhere strictly to the structure outlined above. Its conventions have evolved to facilitate trading large amounts of currency very quickly:

• First, since the U.S. dollar is the predominant currency throughout the world, the OTCmarket has adopted a convention that refines direct and indirect quotes to create a foreign exchange quote system that expresses currency prices in either American or European terms.
• The Over-The Counter market also uses letters rather than symbols to identify currencies.
• Finally, the currency being traded is always expressed first, and is known as the base currency. The currency being used to pay for the transaction is recognized as the quote currency. These conventions apply to both spot and forward quotes in the OTC market. If a currency is quoted in American terms, then the exchange rate is expressed as U.S. dollars per unit of currency. For example, if a market participant requested an exchange rate for the euro, then EUR/USD at 1.2873/75 would be provided. The dealer is willing to buy the base currency (the euro) for 1.2873 dollars (the quote currency) and is willing to sell the euro for 1.2875 dollars.

This is identical to quoting a foreign currency in direct terms in the United States. If a currency is quoted in indirect terms, such as the Swiss franc, then the exchange rate is expressed as foreign currency units per U.S.dollar. A quote CHF/USD 1.2058/55 indicates that the dealer will buy Swiss francs (the base currency) at 1.2058 francs per dollar. Alternatively, the dealer will sell Swiss francs at 1.2055 francs per dollar.

Video: Calculating Conversion Rates