The maxim practiced by the banks is “Buy Low Sell High” for direct quotations and “Buy high Sell Low” for indirect quotation. Let us take an example of a fruit vendor who purchases apple from the market at 1 KG apple for Rs.75 and sells the same to his customers at 1KG apple for Rs.90/-. In the above case, the vendor purchases the fruits at lower rate and sells at higher rate. Thus, the ‘Buy low sell high’ maxim applies to fruit vendor in the above case. Bankers dealing in foreign exchange deal in foreign currencies in place of apple. In currency deal there are two ways to quote a currency pair, known as direct quote and indirect quote. A direct currency quote or home currency quote is simply a currency pair in which the domestic currency is the quoted currency and the foreign currency is the base currency. In the other words, the direct quote varies the domestic currency, and the base, or foreign currency, remains fixed at one unit. For example 1 USD=Rs.74/- is the direct rate.
If today’s quote in Mumbai at a point in time is 74.2500/3600 for USD /INR it means a bank pays out Rs.74.25 while acquiring a US Dollar and it will charge Rs.74.36 while selling the same to its customers. The difference between buying and selling price is a profit to the bank. Therefore, it is clear to us that under direct quotation a bank buys the foreign currency at lower price and selling it to a customer at a higher price. Since bank is buying a foreign currency at a lower rate and sells it to a customer at a higher rate, under direct quotation the maxim practiced is buy low; sell high.
In the indirect quote, on the other hand, the foreign currency is variable and domestic currency remains fixed at one unit. For example, 1 Re= 0.0135 USD or Rs.100=1.3513 USD is the indirect quote. The maxim for indirect quote is the opposite or reciprocal of a direct quote. For example in indirect quote, In New York market 0.785/0.756 USD/GBP. This is an indirect quote as the local currency of US is fixed and foreign currency is variable. The dealer in US buys GBP at 1 USD=0.785 GBP and sells at 1 USD = 0.756 GBP. Here he sells lesser amount of GBP per a USD and books a profit of 0.029 GBP per Dollar. So in the countries wherein indirect quote is practiced the maxim is “Buy high Sell low”.
Normally currency of buyer’s country is converted into currency of seller’s country. India is practicing ‘Direct Quote’ system. Therefore the maxim practiced in India is “Buy Low Sell High”.
