The cost of exchange from one currency regarding another currency is called quotation (quote). Thus, the currency quotation is a price, at which the trader can purchase (ASK) or sell (BID) either currency. In the foreign exchange market the quotation always includes two prices – a currency quotation, at which sellers of this currency are ready to sell, and a currency quotation, at which buyers of this currency are ready to purchase. The banks-marketmakers in standard market conditions quote for their clients both purchase prices and selling prices of the currency, for which they form the market.
Each transaction with a foreign currency includes actions with two currencies, and it is very important to know, which of them is a base currency (or basic) and which is the quotation currency (or counter-currency). The trader always purchases and sells a fixed amount of the ‘basic’ currency and exchange the amount of the quotation currency depending on the exchange rate fluctuations.
The quotation currency is a denominator and a basic currency is a numerator. When the numerator grows, the basic currency strengthens its positions and becomes more expensive, when the numerator decreases, the basic currency weakens and gets cheaper.
When pronouncing the quotation the basic currency is pronounced in the first place. For example, the quotation for ‘dollar-yen’ means that the dollar is a basic currency and a numerator; "dollar-swiss" means that the Swiss franc is a quotation currency; and "sterling-dollar" (usually called "cable") means that a quotation currency is the dollar now. In currencies codes used for the presentation of currency pairs a basic currency usually stands in the first place, and a quotation currency is in the second place. Thus, a ‘dollar-yen’ pair looks as USD/JPY, "dollar - swiss" - USD/CHF, and "sterling-dollar" - GBP/USD.
Currency quotations, as the price of one currency can be in the units of another currency, can be of two types – direct (- a definite amount of the national currency per a unit of a foreign currency) and reverse (the amount of a foreign currency per one unit of the national currency).
Sometimes in literature the term ‘American conditions’ figures, which means a direct quotation from the point of view of the person who is in the United States. Thus, the rate quotation is denominated in different amounts of American dollars and cents per one unit of a foreign currency (for example, the quotation – 1,2800 USD per 1 EUR). In its turn the term ‘European conditions’ means a direct quotation from the point of view of the person who is in Europe (for example, the quotation – 0,8000 EUR per 1 USD).
In practice most prices have ‘direct’ quotations, that is buying a newspaper in the street you pay for it Õ dollars. During the long period all exchange rates had direct quotations. The dollar rate was quoted in Europe under European conditions and in the United States under American conditions. However, in the late 1970s when the foreign exchange market started moving on the way of globalization, the Americans had to re-evaluate this practice. Thus, in the over-the-counter market dollars are now quoted under European conditions with respect to most currencies (that is the amount of the foreign currency per 1 USD) . That means that the dollar is almost always a basic currency, and a foreign currency is a quotation currency.
However, there are two great exceptions out of this common rule. The pound sterling, with respect to which the dollar still remains a quotation currency. Market-makers all over the world quote the pound sterling at the price of X dollars and cents per pound. The system of decimal calculus of quotations was accepted in Great Britain only after 1971 and mathematically it was much easier to quote different amounts of foreign currencies per pound, and not vice versa. The monetary unit of the European Union is euro, which is also quoted in dollars and cents per 1 euro.
Direct and reverse quotations are interconvertible figures and you can easily get one figure from another. Financial editions usually publish both quotations.
Various banks and exchange offices grant different purchase and sell prices of currencies, i.e. different quotations, but these quotations are fixed for a definite period. In the foreign exchange market quotations constantly change as they reflect the current level of demand and supply (BID/ASK).
