What is the difference between direct and indirect foreign exchange pricing?

Time:2021-4-30

In recent years, foreign exchange investment has attracted many people because of its considerable benefits. People who invest in the foreign exchange market should be familiar with the direct and indirect pricing of foreign exchange. Let’s see the difference between them today,

What is the difference between direct price and indirect price?

Direct pricing method, with a certain unit of foreign currency as the benchmark (such as 1100, etc.), converted into a certain amount of domestic currency. China, Japan, Canada and other countries use the direct pricing method. Take China’s foreign exchange rate as an example: at present, the foreign exchange rate of the Bank of China shows that the foreign exchange rate of the US dollar is 672.08, which means US $100 = 672.08 yuan.

The indirect pricing method is opposite to the direct pricing method. It refers to converting a certain unit of domestic currency (such as 1100, etc.) into a certain amount of foreign currency. Indirect pricing is used in the United States, the United Kingdom, the euro area and so on. Take the United States as an example. At present, the RMB exchange rate shown in the United States is generally about 0.14, representing 1 RMB = 0.14 US dollars.

In the foreign exchange market, when we do foreign exchange transactions, we will encounter many currency pairs. The main direct orders are US dollar / Canadian dollar, British pound / US dollar, US dollar / Japanese yen, euro / US dollar and so on. Why not Canadian dollar / US dollar, US dollar / British pound, Japanese yen / US dollar? Because of the Canadian dollar, the Japanese yen is the default direct pricing method, while the British pound and the euro are indirect pricing methods( It can be understood as: the direct pricing method is based on a certain unit of US dollar, so the US dollar is in the denominator position.)

If the price of a currency marked by direct pricing method rises, it means that the domestic currency is devaluing while the corresponding foreign currency is appreciating. vice versa. For example, the exchange rate of RMB against US dollar has dropped from 8 to 6 now, which shows that RMB has increased in value in recent years and US dollar has been depreciating.

Direct pricing method and indirect pricing method can be transformed, and they are reciprocal in calculation. Take RMB and US dollar for example. Taking 1 as the basic unit, China’s direct pricing method is 6.72, so the indirect pricing method adopted by the United States should be 1 / 6.72 = 0.1488, even if it is not the same, it is not too bad. It is also because the exchange rates of different countries are sometimes not unified, the arbitrage mechanism of exchange rate swap can also be realized in the middle.
Explanation of foreign exchange terms(https://www.fx61.com/definitions
The direct pricing method and the indirect pricing method have little influence on the currency itself, but the pricing method is different.

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