If someone wished to shift currencies in the past, they had to first convert their currencies into US dollars, and only then could they convert their dollars into the currency they preferred.
The United States dollar was characterized as a “vehicle currency” because it was utilized as a means of exchange in foreign transactions.
For example, if a person wished to convert their British pound into Japanese yen, they would have to first convert their pound into US dollars, and then these dollars into JPY.
A currency cross pair is a term used in foreign exchange (forex) markets to describe a currency pair that does not include the US dollar. For example, if a trader wants to trade the euro against the Japanese yen, that would be considered a currency cross pair.
These types of currency pairs are often less liquid compared to currency pairs that include the US dollar and are considered to be more niche in the forex market.
Some examples of crosses include GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.
Calculating Currency Cross Rates
Unless you’re into numbers. It’s not difficult, but it might be a little dry at times.
The good news is that this section is no longer required because most broker platforms already calculate cross rates for you.
If, on the other hand, you like to know how everything works, this part is for you! And, aside, it’s always useful to understand how things function, right?
We will show you how to compute the bid (buying price) and ask (selling price) of a currency cross in this part.
Assume we want to know the bid/ask price for GBP/JPY. The first step would be to examine the bid/ask price for both GBP/USD and USD/JPY.
What is the importance of these two pairs?
Because they both have the US dollar as a common denominator.
These two pairs are known as the “legs” of GBP/JPY since they are the corresponding US dollar pairs.
Assume we find the following bid/ask prices:
GBP/USD: 1.5630 (bid) / 1.5635 (ask)
USD/JPY: 89.38 (bid) / 89.43 (ask)
Simply multiply the bid prices for GBP/USD and USD/JPY to get the GBP/JPY bid price.
Congratulations on your score of 139.70! Yay, your calculator is working properly!
Simply multiply the ask prices for GBP/USD and USD/JPY to reach the GBP/JPY ask price of 139.82.
Next Lesson: Why Trade Currency Crosses?
