Currency quotes are read with one currency in relation to another currency, their values reflected in the value of the other. When you look at the forex quote exchange rate for example, between USD and JPY, it will appear as USD/JPY = 120 which is called the currency pair. The base currency is to the left and the counter or quote currency is to the right. The value of the base currency is always equal to 1 – so 1USD, and the counter currency to the right is the amount equivalent of the base currency in that given currency – which is 1USD = 120JPY. To simplify, 1USD can be bought for 120JPY.
Direct vs. Indirect Currency Quotes
Direct and indirect are two ways in quoting currencies. Direct currency quotes are the quotation of the domestic currency; and indirect currency quotes are the currency pair with the base currency of the domestic currency. If you use Euro as the domestic currency and Pound as the foreign currency as an example, a direct quote would look like GBP/EUR and the indirect quote would appear as EUR/GBP. Indirect quotes have the domestic currency fixed as one unit or 1, where the foreign currency trading is variable. With direct quotes, the domestic currency and foreign currency are fixed as one unit or 1.
For example, a direct quote of euro as the domestic currency would appear as 1.20 EUR/GBP – where 1GBP will buy you 1.20EUR. Indirect quotes are just the opposite where it would appear as 0.83 GBP/EUR – where 1EUR will buy you 0.83GBP.
These are currency quotes that do not include the US dollar in its components. The pairs EUR/CHF, EUR/GBP, EUR/JPY are the most common in cross currency.
Ask and Bid
Trading currencies in the financial market include both the bid or buying price and the ask or selling price – all related to the base currency. In purchasing currency pairs, the price of one unit of the base currency relative to the quoted currency is the ask price.
The price of the quoted currency relative to the base currency when selling one unit is the bid price.
Pips and Spreads
The spread is the difference between the bid and ask price. If you look at the example of EUR/GBP = 1.2000/03, 0.0003 or 3 pips / points would be the spread. Though it might appear insignificant, thousands of dollars are lost and gained in the tiniest point changes. The tiniest amount a price moves in currencies is called a Pip.
The Futures and Forwards Market
The futures and forwards market quote forex against USD. The terms of pricing is done with how much USD is required to purchase a unit of other currencies. Using the spot market for example, GBP is quoted against USD as GBP/USD which is also the same with the futures and forwards market. Meaning if the GBP raises in value against USD it will rise as well in the futures and forwards market.