What is a cross currency pair?
Cross currency pairs, also known as cross markets, are currency pairs that do not include the US dollar.
Going back to the past, if someone wants to exchange other currencies, they first have to convert their currencies into US dollars, and then convert the US dollars into the currencies they need.
For example, if someone wants to convert pounds to yen, he first needs to convert pounds to dollars, and then convert dollars to yen.
The emergence of cross currency pairs allows currency traders to bypass the tedious process of converting their currencies into US dollars. They can freely exchange their currencies directly into the currencies they want to exchange. Some common cross currency pairs include: GBP/JPY, EUR/JPY, EUR/CHF and EUR/GBP.
Calculate cross rate
Warning: This section is a bit tedious unless you are interested in numbers. The good news is that this section is actually not that important, because most trading flats have already calculated the cross-currency exchange rate for you.
However, if you are the kind of person who wants to know more, then this section will be very suitable for you to understand. Moreover, it is always good to have a strong curiosity, right?
In this section, we will show you how to calculate the buying and selling prices of cross currency pairs.
For example, we want to know the buy/sell prices of GBP/JPY. First of all, what we have to do is to find the purchase price of GBP/USD and USD/JPY.
Why are these two currency pairs?
Because the British pound/US dollar and the US dollar/Japanese yen are misaligned, they both contain US dollars.
Now, let us look at the bid/ask prices of the above two currency pairs:
GBP/USD: 1.5630 (buying price)/1.5635 (selling price)
USD/JPY: 89.38 (buying price)/89.43 (selling price)
In order to calculate the purchase price of GBP/JPY, you only need to multiply the purchase price of GBP/USD and USD/JPY.
If you get 139.70, then your calculation is completely correct.
Similarly, if you want to calculate the selling price of GBP/JPY, you need to multiply the selling price of GBP/USD and USD/JPY.