What is the role of cross currency? How to calculate the cross rate?

Introduction to foreign exchange/

What is the role of cross currency? How to calculate the cross rate? Let's have a look at today's cross currency exchange rate and exchange rate trading, which is helpful for us to understand.

Cross currency pairs provide more trading opportunities, and more than 90% of transactions in the foreign exchange market involve the US dollar. This is because the dollar is the global reserve currency. You may ask yourself, "why is the global reserve currency in dollars rather than pounds or euros?" most agricultural and industrial commodities, such as oil, are denominated in dollars. If a country needs to buy oil or other agricultural products, it first needs to convert its currency into US dollars before buying related products. This is why most countries use the US dollar as their foreign exchange reserves. As long as they have dollars in their pocket, it will be more convenient for them to buy other foreign goods. China, Japan, Australia and other countries are all major oil importers, so the central banks of these countries have huge foreign exchange reserves in US dollars.

As a matter of fact, China's current foreign exchange reserves have exceeded US $3.3 trillion. So why do we trade cross currency pairs? Given that the US dollar dominates the global monetary system, the vast majority of speculative trading is based on this question: "is the US dollar stronger or weaker today? This question will directly affect the vast majority of the most liquid currency pairs. Major currency pairs: euro / US dollar, pound / US dollar, US dollar / Japanese yen, US dollar / Swiss Franc; commodity currency pairs: Australian dollar / US dollar, US dollar / Canadian dollar, New Zealand dollar / US dollar. Note that all these currency pairs are related to us dollar. When most of traders' trading decisions are based on the change of the US dollar, their trading choices will be less.

What is the role of cross currency? How to calculate the cross rate?

Calculate cross rate

What is the role of cross currency? How to calculate the cross rate? In this section, I'll show you how to calculate the bid and ask prices for cross currency pairs. For example, we want to know the buying / selling price of sterling / yen. First of all, what we need to do is to find the buying rates of GBP / USD and USD / JPY. Why these two currency pairs? Because the two kinds of mismatches, pound sterling / US dollar and US dollar / Japanese yen, contain US dollar. Now, let's take a look at the bid / ask prices of the two currency pairs: pound sterling / dollar: 1.5630 (bid) / 1.5635 (offer), dollar / yen: 89.38 (bid) / 89.43 (offer). In order to calculate the bid price of pound sterling / yen, you only need to multiply the bid prices of pound sterling / dollar and dollar / yen. If you get 139.70, your calculation is absolutely correct. Similarly, if you want to calculate the selling price of GBP / JPY, you need to multiply the selling prices of GBP / USD and USD / JPY.

[disclaimer] the publication of this article by finance managers for the purpose of transmitting more information does not mean that they agree with their views or confirm their descriptions. The content of this article is for reference only, and does not constitute an investment proposal. Investors operate on this basis at their own risk

Was this article helpful?

1 out of 1 found this helpful