Investments, tenth edition

23.1 

  Direct versus Indirect Quotes 

 The exchange rate in Examples 23.1 and 23.2 is expressed as dollars per pound. This is an 

example of a  direct  exchange rate quote. The euro-dollar exchange rate is also typically 

expressed as a direct quote. In contrast, exchange rates for other currencies such as the 

Japanese yen or Swiss franc are typically expressed as  indirect  quotes, that is, as units of 

foreign currency per dollar, for example, 92 yen per dollar. For currencies expressed as 

indirect quotes, depreciation of the dollar would result in a  decrease  in the quoted exchange 

rate ($1 buys fewer yen); in contrast, dollar depreciation versus the pound would show up 

as a  higher  exchange rate (more dollars are required to buy £1). When the exchange rate is 

quoted as foreign currency per dollar, the domestic and foreign exchange rates in Equation 

23.2 must be switched: in this case the equation becomes   

F

0

 (foreign currency/$)

5

1

1 r

foreign

1

1 r

US

3 E

0

 (foreign currency/$) 

If the interest rate in the U.S. is higher than in Japan, the dollar will sell in the forward 

market at a lower price (will buy fewer yen) than in the spot market.