Trading cross-variety, the things you must know!
2024-05-08
Cross-currency pairs, also known as cross rates, can be summarized in one sentence as currency pairs that do not include the US dollar. Generally speaking, most traders would choose to trade in direct currency pairs, so why do cross-currency pairs exist? How are they calculated? What are their advantages?
Which are the cross-currency pairs?
Cross-currency pairs do not have particularly strong liquidity like direct currency pairs, but they still have sufficient liquidity. Here are 21 cross-currency pairs listed:
Australian Dollar against Canadian Dollar (AUD/CAD), Australian Dollar against Swiss Franc (AUD/CHF), Australian Dollar against Japanese Yen (AUD/JPY), Australian Dollar against New Zealand Dollar (AUD/NZD), Canadian Dollar against Swiss Franc (CHF/CAD), Canadian Dollar against Japanese Yen (CAD/JPY), Swiss Franc against Japanese Yen (CHF/JPY), Euro against Australian Dollar (EUR/AUD), Euro against Canadian Dollar (EUR/CAD), Euro against Swiss Franc (CHF/EUR), Euro against British Pound (EUR/GBP), Euro against Japanese Yen (EUR/JPY), Euro against New Zealand Dollar (EUR/NZD), British Pound against Australian Dollar (GBP/AUD), British Pound against Canadian Dollar (GBP/CAD), British Pound against Swiss Franc (GBP/CHF), British Pound against Japanese Yen (GBP/JPY), British Pound against New Zealand Dollar (GBP/NZD), New Zealand Dollar against Canadian Dollar (NZD/CAD), New Zealand Dollar against Swiss Franc (NZD/CHF), New Zealand Dollar against Japanese Yen (NZD/JPY).
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How to trade cross-currency pairs?
By using the cross rate, the currency that is trapped can be used as the base currency, and the strongest currency in the current market can be bought. In this way, through the wave operation of the cross rate, the base currency in hand will increase, and the holding cost will naturally be further reduced, ultimately achieving the goal of unlocking or even making a profit.
The fluctuation space of the cross rate market is relatively large, and any currency can be freely traded as long as it is well grasped, there are many opportunities for profit. After making a profit from the cross-currency pair, you can choose to return to the original base currency or directly return to the US dollar, which is very flexible.The operation of a cross-currency trade involves the direct buying and selling between two non-US dollar currencies without the need to go through the US dollar, which can reduce the spread and lower trading costs.
Calculation of Profits for Cross-Currency Pairs
Traders who wish to engage in cross-currency pair trading should first understand how the quotes are generated. For instance, if we want to understand the bid/ask price for the British Pound/Japanese Yen, the first thing we need to do is find the bid price for the British Pound/US Dollar and the US Dollar/Japanese Yen.
Why these two pairs? Because both the British Pound/US Dollar and the US Dollar/Japanese Yen currency pairs include the US dollar.
Now, let's look at the bid/ask prices for the aforementioned two pairs:
British Pound/US Dollar: 1.38769 (ask price) / 1.38785 (bid price)
US Dollar/Japanese Yen: 108.270 (ask price) / 108.284 (bid price)
To calculate the bid price for the British Pound/Japanese Yen, you simply need to multiply the bid prices of the British Pound/US Dollar and the US Dollar/Japanese Yen.
If you get 150.2819, then your calculation is completely correct.
Similarly, if you want to calculate the ask price for the British Pound/Japanese Yen, you need to multiply the ask prices of the British Pound/US Dollar and the US Dollar/Japanese Yen.The emergence of cross-currency pairs has enabled currency traders to bypass the cumbersome process of converting their currencies into US dollars, achieving currency exchange freedom, and reducing the time and cost associated with it.
Why trade cross-currency pairs?
Trading cross-currency pairs provides financial derivatives traders with more trading opportunities, as these currencies are not limited to the US dollar. New opportunities can be found in currency crosses, and cross-currency pairs allow traders to avoid excessive speculation in the US dollar.
Another reason for traders to consider trading cross-currency pairs is the increased volatility they offer. Compared to traditional US dollar pairs, some cross-currency pairs have greater market advantages. Certain trading strategies rely on volatility, and greater market fluctuations can provide day traders and arbitrageurs with opportunities for trading throughout the day.
In terms of trading capabilities, cross-currency pairs are significantly more challenging than trading direct currency pairs. New traders who want to engage in cross-currency trading should carefully consider the risks. Be aware that when trading some less common cross-currency pairs, be vigilant about their sharp fluctuations and the higher spreads required for trading. The point value of some cross-currency pairs may be higher or lower than that of major pairs, so risk analysis should be conducted before trading.
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