Cross-Rates Calculation In Forex Transactions

forex cross ratesThe dominant status of the USD in Forex trading has led to the fact that in most cases when talking about the exchange rates we mean the behavior of the currency pair, depending on the USD. In other words, the USD has become a fundamental indicator of the behavior of all Forex currencies. However, in some situations, you need the transaction to be done directly between other national currencies without the participation of the USD.

For example, you need to purchase British pounds (GBP) against the Japanese yen (JPY). In this situation, a trader makes a request to his Forex broker like eToro or whatever Forex broker you are trading with. The purpose of the request is to provide such a currency pair (GBP/JPY) for the transaction. Forex currency pairs of this type are called the cross-rates. In such pairs the USD is absent. In general, any currency can be purchased for any other one. For this reason, the number of cross-rates is very high (EUR/JPY, EUR/CHF, GBP/JPY, etc.). If we analyze the difference between cross-rate and the common Forex currency pair, we can easily find the difference. National currencies are always characterized by their material and physical embodiment (banknotes and coins) but cross-rates have no such characteristics, because they do not possess such property as a direct national identity.

Thus, the quotation of cross-rates does not occur directly, but is calculated using the USD. For example, if there is a need to define the cross-rate for EUR/JPY the following process takes place: the Forex trader purchases USD for JPY on the basis of the USD/JPY current rate.  After that, he uses the amount of the purchased USD in order to buy EUR for the current EUR/USD rate. If we represent these operations in the form of mathematical relationship, we find that the USD in the first currency pair plays the role of the numerator and the second – the denominator. If you rely on school rules of arithmetic, the dollar could be reduced. Accordingly, what remains in the formula will represent a Forex cross-rate of EUR/JPY.

 

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