A cross currency pair, or a cross, is a pair of two currencies that do not include the USD.
Back in prehistoric times, if people wanted to convert a currency, they first had to convert to USD. After that, they could convert to the currency they wanted.
Here’s an example… Say you wanted to convert your sterling into yen. You would first have to convert your sterling into U.S. dollars and then convert those into yen. Eventually, currency crosses were invented, which got rid of this tiresome step. A few cross examples are: EUR/JPY and EUR/GBP.
How to Calculate the Cost of Crosses
Disclaimer: This section is pretty boring unless you’re the type that loves to crunch numbers. It is pretty easy but don’t expect to enjoy it too much. Luckily, this isn’t necessary on most platforms today because the currencies are converted for you.
I would recommend reading this section if you are the type of person who enjoys knowing how things work. This section will teach you how to calculate the buying price and the selling price of a cross currency.
Let’s assume that we are trying to find the ask price for GBP/JPY. The first step is to find the ask price for GBP/USD and USD/JPY.
Why this set of currencies, you ask?
Because both sets have the USD as their denominator.
Now, assume we found these ask prices:
GPB/USD: 1.78 (bid) / 1.8 (ask)
USD/JPY: 93.5 (bid) / 94.2 (ask)
To calculate the bid price of GBP/JPY, just multiply the bid prices for both of the USD sets. You get 166.43 as a bid.
Calculating the ask price is just as easy, you just multiply the two ask prices of the USD sets.
You get 169.56 as your ask price.
That was easy, wasn’t it?
Forextips.com is committed to educating the forex trader in all aspects of foreign currency trading. Click here to get information on a free forex webinar to help you maximize your success in the forex market.