Hey there,
I’m having a little trouble understanding Foreign Exchange Quotes. Say I’m given a quote for USD:GBP (GBP per $ USD) of $0.88 GBP per $1 USD.
Is this quote given to someone selling GBP and buying USD or someone selling USD for GBP?
Thanks!
Be careful: USD:GBP (GBP per $ USD) of $0.88 GBP per 1 USD means GBP 0.88/
It’s like a price label in a store that says GBP 0.88/Box, you can buy one box for GBP 0.88, or if you have one box you can sell it for GBP 0.88.
If they had said: Bid = GBP 0.88/Box, Ask = GBP 0.89/Box, then
You can buy one box of fruit for GBP 0.89, or
You can sell them one box of fruit for GBP 0.88/Box
I understand what USD:GBP = 0.88 means, but semantically, I can never remember. Is this a direct quote for USD or GBP? Is there an easy way that you remember which way is “direct”?
Yes there is. Ignore direct/indirect completely, and just read what is written above.
Every time you see the : sign in-between the currencies say “IN” — Example above USD:GBP — USD “IN” GBP… if you are looking for a quote (“PRICE”) that is given to you IN GBP terms – then you must be carrying GBP directly in your wallet…(i.e. why go to McDonalds in Denver and ask for price of a big mac IN GBP??) so direct quote for GBP since quoted IN their terms.
Not sure if that hurts/helps but just how I think about it.
Also if you have Bloomberg access it helps to visualize by pulling up the chart: (USDGBP CRNCY GPC ) is how you would look up the chart of the Dollar against the Pound (key is USDGBP = similar to CFAI notation)… If the chart is going up it means that the dollar is appreciating vs. pound. If you have this sort of access it might help to do some practice problems in front of the terminal – it will click real fast.
So this is a direct quote for GBP?
USD:GBP = 0.88
Yup — the guy in Great Britain expects to pay .88 GBP for a 1 dollar bill… Because we are giving HIS cost (.88) it’s Direct for him.
You could probably also use the word “IS” if that makes more sense – USD:GBP – 1 USD “IS” .88 GBP –
“It’s like a price label in a store that says GBP 0.88/Box, you can buy one box for GBP 0.88, or if you have one box you can sell it for GBP 0.88.”
So using the “bad” direct/indirect terminology, GBP 0.88/Box is the direct quote or direct price for buying 1 box. So when you go to the store, the direct quote is what they are showing as the price for one bo, i.e., it’s the direct quote for buying/selling one box.
If next day you go to the store and tell them you want to buy one GBP, they are going to think you are crazy until they realize you’re a CFA geek and you really mean you want to sell them one box and walk awy with some GBP! In that case, the price of one GBP is not obvious “directly”, hence it is indirectly obtained from GBP 0.88/Box, or 1.14 Box/GBP, so you have to give them 1.14 boxes to walk away with one GBP.
For me, every single time I see:
USD:GBP 0.88
In my mind, I convert it to 1 USD = GBP 0.88
I NEVER miss this part. I just don’t remember if this is a direct quote for USD or GBP.
If that’s how you think about it create a little memory trick — GBP is to the right of the equal sign… Right has an “R” and so does “Direct”… “R” and “R”
Thank you. Perfect. That answer my question.
Anyway, indirect has an R in it too, but it’s okay. 
I get it now.
Hahahaha — I’m an idiot.
Just remember whatever currency value is showing, that’s the country to whicih the quote is direct:
AUD:THB = 40 Baht… this is a direct quote to Thais (and indierect to Australias).
FC:DC Direct
One unit of FC “buys” X units of DC.
Simple, that’s it.
Just to add some additional information which may sounds confusing to some.
If you specify USD:GBP as 0.88 GBP, it means US$1 buys 0.88 GBP or 0.88 GBP per US$1. You can buy 0.88 GBP for US$1 or buy US$1 using 0.88 GBP.
But say you are given USD:GBP (GBP/USD) as 0.88 - 0.89, it means you can buy US$1 using 0.89 GBP or buy 0.88 GBP using US$1. Just take note the quotes is based on dealer’s perspective - BID of 0.88 means dealer will BUY dollars using 0.88 GBP and SELL dollars based on ASK of 0.89 which is opposite from the perspective of buyer which most of the time we will be questioned during exam.