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CFA Level I Exam · Exchange Rate Calculations

Exchange Rate Quotations: Direct, Indirect, Base and Price Currency

Updated 7 October 2026 · Fact-checked

An exchange rate quote is written as price currency per 1 unit of base currency. In A/B = x, one unit of B (base) costs x units of A (price). A direct quote has the domestic currency as the price currency. An indirect quote is its inverse. To invert, take 1 ÷ the rate.

Understand Exchange Rate Quotations and Terminology

A currency is a good, so it has a price. That price is itself in another currency. Every exchange rate therefore has two parts: the base currency (the one you are buying or selling, always 1 unit) and the price currency (also called the quote currency, the one that states the price).

CFA writes quotes as P/B, which means price currency per 1 unit of base currency. If USD/EUR = 1.10, then 1 EUR costs 1.10 USD. EUR is the base. USD is the price currency. Read it as "dollars per euro". The slash is not a division you perform; it is a label that tells you which currency is in the numerator of the price.

Whether a quote is direct or indirect depends on who you are. A direct quote states the price of one unit of foreign currency in domestic currency. A indirect quote states the price of one unit of domestic currency in foreign currency. For a US investor, USD/EUR = 1.10 is direct, because the foreign currency (EUR) is the base. For a euro-based investor, the same pair is indirect. Direct and indirect quotes are inverses of each other: indirect = 1 ÷ direct.

A spot rate is the rate for immediate delivery, with settlement typically two business days later (T+2) for most currency pairs. A forward rate is a rate agreed today for exchange on a future date. Both use the same P/B convention. The forward rate differs from spot because of interest rate differences, a topic covered separately.

The key skill is to translate any quote into words: "price currency per one base currency". Do this first, every time. Most errors come from skipping it.

Key formulas to remember

Quote convention
P/B = units of price currency per 1 unit of base currency
The currency after the slash is the base. It is always 1 unit.
Inverting a quote
B/P = 1 ÷ (P/B)
Use this to switch base and price currency. Invert the number, then swap the labels.
Direct vs indirect
Indirect quote = 1 ÷ direct quote
Direct means domestic currency per 1 foreign. Which is direct depends on the investor's domestic currency.
Converting an amount
Amount in price currency = amount in base currency × (P/B)
Multiply when you hold base currency. Divide when you hold price currency.

How to solve Exchange Rate Quotations and Terminology questions

Use this method for any question on quotes, direction and inversion.

  1. 1Write the quote as P/B and say it in words: price currency per 1 base currency.
  2. 2Identify the domestic currency from the question (the investor's home currency).
  3. 3If the price currency is domestic, the quote is direct. If the base currency is domestic, it is indirect.
  4. 4If the question needs the opposite quote, compute 1 ÷ rate and swap the labels.
  5. 5To convert an amount, check what you hold. Holding base: multiply by the rate. Holding price currency: divide by the rate.
  6. 6Sanity check: if the rate is above 1, 1 unit of the base currency costs more than 1 unit of the price currency, so the base currency is the more valuable one. This works in both directions. Converting a price currency amount into base currency gives a smaller number. Converting a base currency amount into price currency gives a larger number. For USD/EUR = 1.10, 1 EUR costs 1.10 USD, so a USD amount converts into a smaller EUR amount, and a EUR amount converts into a larger USD amount.
  7. 7Round only at the end, then pick the matching option from the three listed smallest to largest.

Quickest way: Cancel-the-label check

When to use it: Use it for any conversion or inversion under time pressure.

  1. Write the rate with units, such as 1.10 USD per EUR.
  2. Set up the conversion so the unwanted currency cancels, like units in a fraction.
  3. Example: EUR 500 × 1.10 USD/EUR leaves USD 550.
  4. If the unit does not cancel, you are using the rate the wrong way up. Invert it.
  5. On a TI BA II Plus or HP 12C, invert with the 1/x key. Enter 1.10 then press 1/x to get 0.9091.

Common mistakes in Exchange Rate Quotations and Terminology

  • Reading USD/EUR as dollars divided by euros and treating USD as the base.

    The slash looks like a fraction, so students assume the first currency is the one being priced.

    Fix: Remember the first currency is the price currency. The second is the base, worth 1 unit. Say 'dollars per euro' aloud.

  • Calling a quote direct or indirect without checking whose domestic currency it is.

    Students memorise that a given pair is direct, but the label depends on the investor.

    Fix: Ask which currency is domestic. If it is the price currency, the quote is direct. If it is the base, indirect.

  • Multiplying when you should divide in a conversion.

    Students apply the rate without checking which currency they hold.

    Fix: Use the cancel-the-label check. Hold base: multiply. Hold price currency: divide.

  • Inverting the number but forgetting to swap the labels.

    The arithmetic feels like the whole job, so the pair name stays the same.

    Fix: After computing 1 ÷ rate, rewrite the pair. USD/EUR = 1.25 becomes EUR/USD = 0.80.

  • Confusing spot and forward rates, or assuming a forward rate is a prediction of the future spot rate.

    The word 'forward' suggests a forecast.

    Fix: A forward rate is a contract price agreed now for a later date. It reflects interest rate differences and is not a forecast of the future spot rate.

Worked examples

Example 1

The illustrative quote GBP/USD = 0.8000 is given (a hypothetical figure used to practise the P/B convention). Which statement is correct for a US-based investor? A) The quote is direct and 1 USD costs 0.8000 GBP. B) The quote is indirect and 1 USD costs 0.8000 GBP. C) The quote is direct and 1 GBP costs 0.8000 USD.

Show the solution
  1. Read the quote as P/B: GBP is the price currency and USD is the base. So 1 USD costs 0.8000 GBP.
  2. The US investor's domestic currency is USD. The base currency is domestic and the price currency (GBP) is foreign, so the quote is indirect.
  3. Option A is wrong because it calls the quote direct. The price currency is foreign, so it is not direct.
  4. Option C is wrong because 1 GBP does not cost 0.8000 USD. The quote says 1 USD costs 0.8000 GBP. Option C also calls the quote direct. Option B matches.
  5. Follow-up: the inverse quote is USD/GBP = 1 ÷ 0.8000 = 1.2500. This means 1 GBP costs 1.2500 USD. The price currency (USD) is domestic, so this is the direct quote for this investor.

Answer: Option B is correct: the quote is indirect. As a follow-up, USD/GBP = 1.2500.

Example 2

A eurozone investor holds USD 33,000 and the quote is USD/EUR = 1.1000. How many euros does the investor receive, ignoring costs? Options: A) EUR 30,000 B) EUR 36,300 C) EUR 39,930.

Show the solution
  1. Read the quote: 1 EUR costs 1.1000 USD. EUR is the base. USD is the price currency.
  2. The investor holds the price currency (USD), so divide by the rate.
  3. EUR = 33,000 ÷ 1.1000 = 30,000.
  4. Check: 30,000 × 1.1000 = 33,000 USD, so the units cancel correctly.
  5. Option B comes from multiplying once (33,000 × 1.1 = 36,300), which is the wrong direction. Option C comes from multiplying by 1.1 twice (33,000 × 1.1 × 1.1 = 39,930), which is not a sensible approach.

Answer: Option A: EUR 30,000.

Exam tips

  • Always translate the quote into words before doing any arithmetic. It takes five seconds and removes most traps.
  • Wrong options are often the result of multiplying instead of dividing, or of using the unchanged rate. Compute the sensible answer first, then match it.
  • Check the question for the investor's domestic currency before calling a quote direct or indirect.
  • Use the 1/x key for inversion and keep four decimal places until the final answer.
  • Use the sanity check: if 1 EUR costs more than 1 USD (the rate is above 1), EUR is the more valuable currency. A USD amount converts into a smaller EUR amount, and a EUR amount converts into a larger USD amount.

Practice questions from Exchange Rate Calculations

Exchange Rate Quotations and Terminology in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Exchange Rate Quotations and Terminology: frequently asked questions

What is the difference between a direct and an indirect quote?

A direct quote gives the domestic price of one unit of foreign currency. An indirect quote gives the foreign price of one unit of domestic currency. They are inverses, so indirect = 1 ÷ direct.

Which currency is the base currency in a quote like USD/EUR?

The base is the second currency, EUR. The first, USD, is the price currency. The quote means USD per 1 EUR.

How do I invert an exchange rate quote?

Divide 1 by the rate and swap the currency labels. For example, USD/EUR = 1.25 gives EUR/USD = 1 ÷ 1.25 = 0.80.

What is the difference between a spot rate and a forward rate?

A spot rate applies to an exchange for immediate settlement, usually in two business days for most pairs. A forward rate is agreed today for an exchange on a set future date. The two differ mainly because of interest rate differences between the currencies.