Foreign exchange quotation is the amount of currency that is exchanged for a unit of another currency.
Foreign exchange quotations can be two types, they are:
1. Direct Quotation
2. Indirect Quotation
Direct quotation: A direct quote expresses the price of one unit of foreign currency in terms of domestic currency. In other words, it is the home currency that would cost you to purchase one unit of the foreign currency.
USD/INR = Rs.88.30
For instance, a quotation of Rs. 88.30 per dollar in India is a direct quotation for the rupee.
Rs.88.30 is required to buy 1 US dollar
Indirect Quotation: An indirect quote shows how much foreign currency one unit of domestic currency can buy.
INR/USD = 1 ÷ 88.30 = 0.0111
Now let’s discuss about bid rate, ask rate and spread.
Bid Rate
The bid rate is the rate at which the bank is willing to buy foreign currency.
Example:
If a bank quotes:
USD/INR = 88.30 / 88.40
88.30 is the bid rate
The bank buys USD from the customer at Rs.88.30
This rate is applicable for exporters (they sell dollar).
Ask (Offer) Rate
The ask rate is the rate at which the bank sells foreign currency.
- 88.40 is the ask rate
- The bank sells USD to customers at Rs 88.40
This rate is applicable for importers (they buy dollars).
Spread
The spread is the difference between the ask rate and bid rate.
Calculation:
Spread = Ask – Bid
= 88.40 – 88.30
= Rs.0.10 per USD
This is the bank’s margin for providing forex services.
Example:
An Indian exporter receives USD 1,00,000 from the US.
- Bank buys USD at 88.30
- Exporter receives = 100,000 × 88.30 = Rs.88,30,000
An Indian importer needs USD 100,000.
- Bank sells USD at 88.40
- Importer pays = 100,000 × 88.40 = Rs. 88,40,000
The difference of Rs.10,000 is part of the spread income for the bank.
A forex story: Debom and Radhika at the Bank
One afternoon, Debom and Radhika walk into a bank after their International Finance lecture. Debom looks curious.
Debom:
Radhika, the professor said exchange rates are not single numbers. He mentioned bid rate, ask rate, and spread. Can you explain this with a real situation?
Radhika (pointing to the forex board):
Look at this quote:
USD/INR = 83.20 / 83.30.
This is a direct quote for India.
Debom:
So this tells us the price of one dollar in rupees?
Radhika:
Exactly. Now see the two numbers. The bank is ready to buy dollars at Rs.83.20 — that’s the bid rate.
And it will sell dollars at Rs.83.30 — that’s the ask rate.
Debom:
So exporters and importers see different rates?
Radhika:
Yes. If an exporter comes with dollars, the bank buys at the bid rate.
If an importer needs dollars, the bank sells at the ask rate.
Debom calculates quickly
Debom:
The difference is Rs.0.10. Is that important?
Radhika:
That difference is called the spread.
It’s the bank’s margin for providing forex services.
Debom:
What about the indirect quote?
Radhika:
Just flip the rate.
INR/USD = 0.01202 / 0.01201.
Now it shows how many dollars one rupee can buy.
Debom:
So it’s the same rate, just viewed from the opposite angle.
Radhika smiles.
Radhika:
Direct or indirect, bid or ask — everything affects real cash flows. That’s why these are fundamental in international finance.
Debom:
Now I understand. Exchange rates are not just numbers; they decide who gains, who pays, and how much. They walked out of the bank looking relaxed and confident, as the fundamentals of forex had finally become clear.
