Def. An exchange rate is the price of one currency in terms of another.

~ Wednesday, November 4, 2009
A complication is that there are two ways to express any exchange rate.

Direct quote: the number of units of home currency necessary to buy one unit of foreign currency - the home currency price of foreign currency

Indirect quote: the number of units of foreign currency necessary to buy one unit of home currency - the foreign currency price of home currency

In terms of the dollar we have

American terms: dollars per other currency unit

European terms: other currency units per dollar

For example, suppose that the pound is trading at 2.0000 dollars per pound. We could also express the exchange rate at .5000 pounds per dollar.

Direct quote: the number of units of home currency necessary to buy one unit of foreign currency - the home currency price of foreign currency : .5000

Indirect quote: the number of units of foreign currency necessary to buy one unit of home currency - the foreign currency price of home currency: 2.0000

In terms of the dollar we have

American terms: dollars per other currency unit: 2.0000

European terms: other currency units per dollar: .5000

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