Strategic Financial Management · Foreign Exchange Risk Management

Foreign Exchange Market and Quotations: Direct, Indirect and Cross Rates

Updated 11 October 2026 · Fact-checked

A foreign exchange quotation states the price of one currency in terms of another. A direct quote gives home currency per unit of foreign currency; an indirect quote is its reciprocal. To solve problems, fix the base currency, use the bid for selling the base to the dealer and the ask for buying, then derive cross rates and forward premium or discount.

Understand Foreign Exchange Market and Quotations

The foreign exchange market is the over-the-counter market where currencies are bought and sold. In India, authorised dealers (mainly banks) deal with customers and with each other. The interbank market is where banks trade among themselves. The RBI regulates the market and can intervene to manage volatility.

Every rate is a price. In a quote like USD/INR = 83.2000, the first currency (USD) is the base currency and the second (INR) is the quote (or term) currency. The rate tells you how many units of the quote currency buy one unit of the base currency.

A direct quote (from India's view) gives rupees per one unit of foreign currency, for example ₹83 per USD. An indirect quote gives foreign currency per ₹1 (or per ₹100), for example USD 0.01205 per rupee. One is the reciprocal of the other. Which one is direct depends on whose home currency you take, so always ask: whose view is the question using?

Dealers quote two prices. The bid is the rate at which the dealer buys the base currency. The ask (offer) is the rate at which the dealer sells it. The ask is always higher than the bid. The difference is the spread, which is the dealer's margin. You, the customer, always deal at the rate that is worse for you.

A cross rate is an exchange rate between two currencies derived from each one's rate against a third currency, usually USD. A forward rate is the rate fixed today for delivery on a future date. If the forward price of the foreign currency is higher than spot, it is at a premium; if lower, at a discount. The gap reflects the interest rate difference between the two currencies.

Key rules to remember

Direct and indirect quote: Indirect quote = 1 ÷ Direct quote; For bid and ask, reverse them: Indirect bid = 1 ÷ Direct ask, and Indirect ask = 1 ÷ Direct bid.
Bid-ask spread (absolute): Spread = Ask − Bid; Always positive. Quoted in paise or pips.
Bid-ask spread (percentage): Spread % = (Ask − Bid) ÷ Ask × 100; Some questions use bid or the mid-rate as the denominator. Follow the question; if silent, state your base.
Cross rate (both quoted against common currency as base): A/C = (A/B) × (B/C); Cancel the common currency B. Bid × bid gives the cross bid; ask × ask gives the cross ask.
Cross rate (common currency is the base in one and quote in the other): A/C = (B/C) ÷ (B/A); For bid, divide the bid of B/C by the ask of B/A. For ask, divide the ask of B/C by the bid of B/A.
Forward premium or discount (annualised): (Forward − Spot) ÷ Spot × (12 ÷ n) × 100, where n is months; Positive means the base currency is at a premium; negative means a discount. For days, use 365 ÷ days.
Forward rate from points: Forward = Spot + Premium points (or − Discount points); Quote points are added when ascending (bid points lower than ask points) and subtracted when descending.

How to solve Foreign Exchange Market and Quotations questions

Use the same sequence for every quotation question. It keeps you from reversing bid and ask.

1Write each rate as 'Base/Quote' with its bid and ask. Mark which is direct or indirect for the home currency named in the question.
2Decide the transaction from the dealer's side. If the customer buys the base currency, the dealer sells at the ask. If the customer sells it, the dealer buys at the bid.
3If a reciprocal is needed, invert and swap: new bid = 1 ÷ old ask, new ask = 1 ÷ old bid.
4For cross rates, line the currencies up so the common currency cancels. Multiply, or divide using the opposite side (bid ÷ ask, ask ÷ bid).
5For forward rates, add or subtract the points to the spot bid and ask separately. Check the ask stays above the bid.
6For premium or discount, use (Forward − Spot) ÷ Spot, annualise by 12 ÷ months, and state whether it is a premium or discount.
7Check sense: ask is greater than bid, and the final rate is in the units the question asks for. Write a one-line conclusion.

Quickest way: Cancel-the-currency and worse-for-you shortcut

When to use it: Use for MCQs and for the first part of long cross rate or forward quote questions when time is short.

Write the currencies as a chain, such as EUR/USD × USD/INR, and confirm the middle currency cancels.
For a chain of multiplications, multiply bids with bids and asks with asks.
If you must divide, divide using opposite sides so the result is the dealer's most cautious rate.
For the customer's rate, always choose the less favourable side: you pay the ask and receive the bid.
For a quick premium check, compute (Forward − Spot) ÷ Spot first, then multiply by 12 ÷ months once.

Common mistakes in Foreign Exchange Market and Quotations

Using the bid when the customer buys the base currency.
Students think from their own side instead of the dealer's.
Fix: The bid and ask belong to the dealer. A customer buying the base currency pays the ask; a customer selling it receives the bid.
Inverting a quote without swapping bid and ask.
1 ÷ rate feels like a simple reciprocal, so both sides are inverted in place.
Fix: Indirect bid = 1 ÷ direct ask and indirect ask = 1 ÷ direct bid. Check the new ask is bigger than the new bid.
Multiplying bid by ask in cross rate calculations.
Students mix sides while chaining rates.
Fix: In a multiplication chain, bid × bid and ask × ask. In a division, use bid ÷ ask for the bid and ask ÷ bid for the ask.
Calling a currency at a premium when it is at a discount, or reading the point direction wrongly.
Premium and discount refer to the base currency, and students forget which currency is the base.
Fix: Forward above spot means the base currency is at a premium. Name the currency in your answer.
Forgetting to annualise the premium or discount.
The first division gives a periodic figure that looks like a final percentage.
Fix: Multiply by 12 ÷ months (or 365 ÷ days) unless the question asks for the premium for the period.
Adding forward points when the points are descending.
Students add points automatically.
Fix: If the bid points are higher than the ask points, the points are discounts and are subtracted. Check the forward ask stays above the forward bid.

Worked examples

Example 1

An Indian bank quotes USD/INR spot as ₹83.10 – ₹83.30. (a) Find the spread in rupees and as a percentage of the ask rate, correct to two decimals. (b) Find the indirect quote (USD per ₹1) bid and ask, to five decimals.

Show the solution

The dealer buys USD at ₹83.10 (bid) and sells USD at ₹83.30 (ask).
Spread = 83.30 − 83.10 = ₹0.20.
Spread % = 0.20 ÷ 83.30 × 100 = 0.2401%, i.e. 0.24%.
Indirect bid = 1 ÷ direct ask = 1 ÷ 83.30 = 0.01200.
Indirect ask = 1 ÷ direct bid = 1 ÷ 83.10 = 0.01203.
Check: ask 0.01203 is above bid 0.01200.

Answer: Spread = ₹0.20 (0.24% of the ask). Indirect quote: USD 0.01200 – 0.01203 per ₹1.

Example 2

Spot rates: USD/INR = 83.00 – 83.20 and EUR/USD = 1.0800 – 1.0850. (a) Find the EUR/INR cross rate. (b) The 3-month forward USD/INR is quoted at 83.60 – 83.85. Find the annualised forward premium on the ask side relative to the spot ask, to two decimals, and say whether USD is at a premium or discount.

Show the solution

EUR/INR = EUR/USD × USD/INR. USD cancels, so multiply bid by bid and ask by ask.
Cross bid = 1.0800 × 83.00 = ₹89.64.
Cross ask = 1.0850 × 83.20 = ₹90.272, i.e. ₹90.27.
So EUR/INR = 89.64 – 90.27.
Forward premium (ask side) for 3 months = (83.85 − 83.20) ÷ 83.20 = 0.65 ÷ 83.20 = 0.007812.
Annualised = 0.007812 × (12 ÷ 3) × 100 = 3.125%, i.e. 3.13%.
The forward is above spot, so USD is at a premium against INR.

Answer: EUR/INR = ₹89.64 – ₹90.27 (approx). USD is at an annualised forward premium of about 3.13% against the rupee on the ask side.

Exam tips

Write bid and ask in a small table at the start of each answer and mark the dealer's side. Examiners award method marks for this.
In MCQs, test options quickly: ask must exceed bid, and a cross rate must lie in a sensible range from the two inputs.
State the base currency every time you say premium or discount. Marks are lost for ambiguity.
Show the annualisation step separately in forward premium questions, because the periodic figure and annualised figure are often both tested.
Keep four decimals in intermediate rates and round only the final answer, as small rounding differences can change the final MCQ option.

Practice questions from Foreign Exchange Risk Management

Foreign Exchange Market and Quotations in other exams

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

Foreign Exchange Market and Quotations: frequently asked questions

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

A direct quote gives units of home currency per unit of foreign currency, such as ₹83 per USD. An indirect quote gives units of foreign currency per unit of home currency, such as USD 0.012 per ₹1. They are reciprocals, and which is direct depends on whose home currency you use.

How do I calculate a cross rate with bid and ask?

Line up the currencies so the common one cancels. If you multiply, use bid × bid for the cross bid and ask × ask for the cross ask. If you divide, use bid ÷ ask for the cross bid and ask ÷ bid for the cross ask.

How do I calculate forward premium and discount?

Compute (Forward − Spot) ÷ Spot, then multiply by 12 ÷ number of months (or 365 ÷ days) and by 100. A positive result is a premium on the base currency and a negative result is a discount.

Why is the ask rate always higher than the bid rate?

The dealer buys at the bid and sells at the ask. The gap is the dealer's margin and covers cost and risk. If the ask were lower, the dealer could lose money on every pair of trades.