Indirect Pricing

The indirect pricing method is a pricing method for foreign exchange rates. It uses a certain unit of domestic currency as the basis to express the amount of foreign currency that can be exchanged. For example, 1 US dollar = 0.9705 euros is an indirect pricing method, which means that 1 US dollar can be exchanged for 0.9705 euros. The indirect pricing method is also called the receivable pricing method because it indicates how much foreign currency holders of domestic currency can receive.

Features of Indirect Pricing

1. The quantity of domestic currency is fixed and the quantity of foreign currency changes as the exchange rate changes.

2. Exchange rates rise and fall in inverse proportion to the value of foreign currencies. If the exchange rate rises, it means that the domestic currency appreciates and foreign currencies depreciate; if the exchange rate falls, it means that the domestic currency depreciates and foreign currencies appreciate.

3. The indirect pricing method is suitable for situations where the domestic currency is relatively strong or stable, because it can highlight the advantages or stability of the domestic currency.

How to Use Indirect Pricing Method?

• The units used to determine domestic currency and foreign currency are generally based on 1 unit of domestic currency.

• Find or calculate the exchange rate of domestic currency against foreign currency, that is, how many units of foreign currency can be exchanged for 1 unit of domestic currency.

• According to the amount of domestic currency or foreign currency that needs to be exchanged, the exchange rate is used to perform corresponding multiplication or division operations to obtain the exchange result.

For example, assuming that 1 U.S. dollar = 0.9705 euros, if you want to exchange 1,000 U.S. dollars for euros, multiply 1,000 by 0.9705 to get 970.5 euros; if you want to exchange 1,000 euros for U.S. dollars, divide 1,000 by 0.9705 to get 1,030.4 U.S. dollars.

Differences Between Indirect Pricing Method and Direct Pricing Method

1. The direct quotation method uses a certain unit of foreign currency as the basis to express the amount of domestic currency that can be exchanged. For example, 1 euro = 1.0304 US dollars is a direct pricing method, which means that 1 euro can be exchanged for 1.0304 US dollars. The direct quotation method is also called the payable quotation method because it indicates how much foreign currency holders need to pay for domestic currency.

2. The direct pricing method and the indirect pricing method are actually reciprocal to each other. If A/B is used to represent the exchange rate of A to B, then A/B under the direct pricing method is equal to the reciprocal of B/A under the indirect pricing method. For example, 1 euro = 1.0304 US dollars under the direct pricing method is equal to the reciprocal of 1 US dollar = 0.9705 euros under the indirect pricing method.

3. The direct pricing method and the indirect pricing method are also opposite in the relationship between exchange rate fluctuations and the value of foreign currencies. Under the direct pricing method, the exchange rate rises and falls in direct proportion to the value of the foreign currency; under the indirect pricing method, the exchange rate rises and falls in inverse proportion to the value of the foreign currency.