Looking for the answer to the question below related to Financial Management ?
________ is also known as price quotation.
|A. Direct Quote
B. Indirect Quote
C. Spot Quote
D. Spread Quote
The Correct Answer Is:
- A. Direct Quote
The correct answer is A. Direct Quote.
Why A (Direct Quote) is the Correct Answer:
A “Direct Quote” is also known as a “Price Quotation” in the context of foreign exchange markets. It represents a method of quoting exchange rates where the foreign currency is expressed as a fixed unit, and the domestic currency is expressed as the variable quantity of that unit. Here’s a detailed explanation of why A is the correct answer:
1. Direct Quote Definition:
In a direct quote, the exchange rate is expressed as the amount of domestic currency required to purchase one unit of the foreign currency. For example, if a direct quote for the EUR/USD currency pair is 1.20, it means that 1.20 U.S. Dollars (USD) are required to purchase 1 Euro (EUR).
2. Fixed Foreign Currency:
In a direct quote, the foreign currency is considered the fixed unit of measure, and its value is always equal to 1 unit. This allows for easy comparison of exchange rates across different currencies.
3. Variable Domestic Currency:
The domestic currency in a direct quote is the variable quantity that you receive in exchange for 1 unit of the foreign currency. It represents the price or quantity of the domestic currency in terms of the foreign currency.
4. Common Usage:
Direct quotes are commonly used in countries where the domestic currency is relatively strong or stable, and it is more convenient to express the value of foreign currencies in terms of the domestic currency. For example, in the United States, the USD is often used as the fixed unit in direct quotes.
5. Comparative Analysis:
Direct quotes make it easy to compare the relative strength or weakness of different currencies. A higher direct quote for a foreign currency indicates that it is stronger relative to the domestic currency, while a lower direct quote suggests the opposite.
Why the Other Options are Not Correct:
B. Indirect Quote:
An “Indirect Quote” is another method of quoting exchange rates, as explained in a previous response. In an indirect quote, the domestic currency is expressed as the fixed unit, and the foreign currency is expressed as the variable quantity. It does not relate to the concept of a direct quote or a price quotation.
C. Spot Quote:
A “Spot Quote” represents the exchange rate for a currency pair in the current market, where transactions are settled immediately. Spot quotes are used for immediate currency exchange and do not necessarily involve expressing exchange rates as a fixed unit and variable quantity.
D. Spread Quote:
A “Spread Quote” refers to the bid-ask spread, which is the difference between the highest price a buyer (bid) is willing to pay and the lowest price a seller (ask) is willing to accept for a financial instrument. It is not synonymous with the concept of a direct quote or a price quotation.
In conclusion, the correct answer is A because a “Direct Quote” is also known as a “Price Quotation,” where the foreign currency is expressed as a fixed unit, and the domestic currency is expressed as the variable quantity of that unit.
This method of quoting exchange rates is fundamental in foreign exchange markets for understanding the relative value of currencies. The other options represent different aspects of forex trading and pricing but do not specifically describe the concept of a direct quote or a price quotation.