Direct vs. Indirect Quotes

CFA Level I
#1

Had a mini brain melt today when I was reading a currency quote in the paper. I want to make sure I understand the difference between direct and indirect quotes correctly. The CFA curriculum uses indirect currency quotes for all of its calculations, correct? Let me clarify.

Direct quote in newspaper: EUR/USD: 1.12 -> This essentially is saying 1 Euro gets you $1.12. If tomorrow, the quote was 1.14, that would mean the EUR appreciated relative to the dollar, correct? Essentially, in a direct quote, the EUR is the base currency, and the USD is the price (or quoted) currency…

It seems that the CFA curriculum uses indirect quotes? I understand the logic is just reversed (base currency in the denominator) but what is the purpose of this? It seems that in the real world direct quotes are used, hence why I got confused when reading the newspaper.

Can someone clarify this and confirm everything I’ve said is true to my understanding?

#2

CFA Institute’s convention is the reverse of the real world’s.

To CFA Institute, EUR/USD 1.12 would mean that you have to exchange EUR 1.12 to get USD 1.00.

It’s not about direct versus indirect. It’s about which currency in the pair is the base currency and which is the price currency. In the real world, the first currency listed is the base currency and the second is the price currency. In CFA Institute’s world, the first currency listed is the price currency and the second is the base currency.

1 Like
#3

Why on earth would they do this? Spend the time to learn something just so that I need to make sure I do the opposite.

#4

Got me.

That about sums it up.

#5

-_-’