Exchange Rate Quotations: Direct, Indirect and Two-Way
Find the base currency and the quoting bank's side first; the rest of the quote follows.
An exchange rate is the price of one currency in terms of another. Every quote names two currencies: the base currency, which is the one unit being priced, and the quote currency, in which the price is expressed. In USD/INR 88.50 (an illustrative figure), USD is the base and one dollar costs ₹88.50.
Most quotation errors in the exam come from losing track of which currency is the base. Fix that first and the buy-sell logic follows.
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Direct and Indirect Quotation
Seen from India, with illustrative figures:
Direct (price quotation)
What is fixed
One unit (or 100 units) of foreign currency
Example
USD 1 = ₹88.50
Used for
All merchant quotes in India (FEDAI Rule 5.7)
Indirect (quantity quotation)
What is fixed
A fixed amount of home currency
Example
₹100 = USD 1.1299
Used for
Older Indian practice; still met in theory questions
| Method | What is fixed | Example | Used for |
|---|---|---|---|
| Direct (price quotation) | One unit (or 100 units) of foreign currency | USD 1 = ₹88.50 | All merchant quotes in India (FEDAI Rule 5.7) |
| Indirect (quantity quotation) | A fixed amount of home currency | ₹100 = USD 1.1299 | Older Indian practice; still met in theory questions |
Why Direct Quotation Matters in India
FEDAI Rule 5.7 says merchant rates are quoted in direct terms: so many rupees and paise for 1 unit or 100 units of foreign currency. Currencies with a small unit value, such as the Japanese yen, are commonly quoted per 100 units.
Under direct quotation the maxim is "buy low, sell high": the bank buys foreign currency at the lower rate and sells at the higher rate. Under indirect quotation it reverses, because the bank wants more foreign currency per ₹100 when it buys and gives less when it sells. A good share of quotation MCQs simply test whether you apply the right maxim to the right method.
Reading a Two-Way Quote
Banks quote two prices at once. Take USD/INR 88.4800/88.5200 (illustrative):
- Bid
- The first, lower figure (88.4800): the rate at which the quoting bank buys the base currency.
- Ask or offer
- The second, higher figure (88.5200): the rate at which the quoting bank sells the base currency.
- Spread
- Ask minus bid, here 4 paise. It is the quoting bank's margin and widens when the market is thin or volatile.
- Points or pips
- The last decimal places of a quote. Dealers often quote only the changing digits, so 88.48/52 means 88.4800/88.5200.
- Market maker
- The bank that gives the two-way quote. The counterparty asking for the price always gets the less favourable side: it sells at the bid and buys at the ask.
Bid, ask and conversion questions. No signup.
A Quick Method for Any Quote Question
- 1
Identify the base currency
It is the currency on the left of the pair, or the one unit being priced.
- 2
Identify who is quoting
The rates are always from the quoting bank's side, not the customer's.
- 3
Decide whether the bank is buying or selling the base currency
An exporter selling dollars to the bank: bank buys, so bid. An importer buying dollars: bank sells, so ask.
- 4
Check the quotation method
Direct: bank buys low, sells high. Indirect: the reverse.
How CCFE Tests This
Typical questions give a two-way quote and ask the rate for a customer transaction, or convert a direct quote into indirect (₹100 divided by the direct rate). The trap is reading the quote from the customer's side and picking the ask when the bank is buying. A second trap: when converting a two-way quote from direct to indirect, the bid and ask swap places as well as invert.
FAQs
What is the difference between direct and indirect quotation?expand_more
A direct quote fixes one unit of foreign currency and varies the home currency (USD 1 = ₹88.50). An indirect quote fixes the home currency and varies the foreign currency (₹100 = USD 1.1299).
Which quotation method do Indian banks use?expand_more
Direct. FEDAI Rule 5.7 requires merchant rates to be quoted as rupees and paise per 1 or 100 units of foreign currency.
In a two-way quote, which rate does the bank buy at?expand_more
Under direct quotation, the lower rate (bid). The bank buys the base currency at the bid and sells it at the ask.
How do you convert a direct quote into an indirect quote?expand_more
Divide 100 by the direct rate for an indirect quote per ₹100. For a two-way quote, invert each side and swap their order, so the new bid comes from the old ask.
Next steps
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