Currency quotation — Definition Explained Simply | Examples & Role
Currency quotation is the determination of the exchange rate of a foreign currency against the national or another foreign currency, usually carried out by banks or financial institutions.
Currency quotation is the process of determining and fixing the exchange rate of a foreign currency in accordance with legal norms and established practice. A quotation shows how many units of one currency are needed to buy one unit of another currency. This is usually done by central banks, major commercial banks, or exchanges.
According to financial practice, a currency quotation reflects the supply and demand balance in the foreign exchange market and is used to establish official exchange rates. For example, if the EUR/USD quotation is 1.08, it means that 1 euro equals 1.08 US dollars.
Methods of currency quotation
There are two main methods of quotation:
- Direct quotation — shows how many units of the national currency must be paid for one unit of foreign currency (the most common method).
- Indirect quotation — shows how many units of foreign currency equal one unit of the national currency.
For example, in Russia a direct quotation is used: the US dollar is quoted in rubles. In the United Kingdom, an indirect quotation is traditionally applied: the pound is expressed in a certain amount of dollars or euros.
The role of currency quotation
Currency quotations form the basis for all operations in the foreign exchange market (Forex), in banking transactions, and in international trade. They allow investors, companies, and individuals to understand the current value of currencies and make decisions about buying, selling, or exchanging. Central banks use quotations when shaping monetary policy and maintaining the stability of the national currency.
Examples
- EUR/USD = 1.08 means that 1 euro equals 1.08 US dollars.
- USD/JPY = 150 means that 1 US dollar equals 150 Japanese yen.
- In Russia, the dollar is quoted in rubles (e.g., 1 USD = 95 RUB).