Question : Which of the following is an example of a direct exchange rate quotation?
Option 1: USD/EUR = 1.25
Option 2: EUR/USD = 0.80
Option 3: GBP/USD = 1.40
Option 4: AUD/JPY = 82.50
Correct Answer:
USD/EUR = 1.25
Solution : The correct answer is a) USD/EUR = 1.25
An example of a direct exchange rate quotation is when the domestic currency is expressed as the base currency and the foreign currency is expressed as the quote currency. In this case, the USD/EUR = 1.25 indicates that 1 United States Dollar (USD) can be exchanged for 1.25 Euros (EUR).
In contrast, an indirect exchange rate quotation is when the foreign currency is expressed as the base currency and the domestic currency is expressed as the quote currency. Examples b), c), and d) are all indirect exchange rate quotations:
b) EUR/USD = 0.80 indicates that 1 Euro (EUR) can be exchanged for 0.80 United States Dollars (USD).
c) GBP/USD = 1.40 indicates that 1 British Pound (GBP) can be exchanged for 1.40 United States Dollars (USD).
d) AUD/JPY = 82.50 indicates that 1 Australian Dollar (AUD) can be exchanged for 82.50 Japanese Yen (JPY).
