2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
Cross-rates are a phenomenon that belongs to the category of currency exchange operations, which has become widespread in Forex. Interestingly, this phenomenon involves transactions with currency pairs in which the dollar does not appear as a base or priority currency.
General Description
Since the majority of currency transactions in the Forex market are made with the dollar, cross-rates are the prerogative of exclusively traders who have a very impressive trading experience, a set of knowledge of the micro- and macroeconomic situation in the country whose currency is involved in the auction. But quite often the dollar also takes part in this type of trading.
Among the most popular types of cross-rates, it is customary to single out the following:
- yen and Swiss franc;
- pound sterling and Canadian dollar.
For these pairs, the principle of reverse and direct currency quotes is not applicable.
In general, there are three main currency quotes on the Forex market:
- The cross quote described here.
- A straight line isa unit of an existing foreign currency, displayed in dollar terms. Usually it is written like this: JPY / USD (in this pair, the currency of interest of a foreign state is the first).
- Reverse - the unit of the US dollar, expressed in the currency of a foreign state. It is prescribed in the same way with a direct quote, but in such a pair the dollar comes first: USD\EUR.
Cross-rate of dollar and euro. Currency calculations
Recently, the dollar and the euro have become regular participants in cross-rates for most world currencies, so it is difficult to underestimate the importance of their calculations. In this case, cross rates are an opportunity for trading, and it is calculated in three ways when it comes to the dollar. Consider them:
- There is an importer with a partner from Hong Kong. The dealer needs to calculate transactions based on the quote of both the Hong Kong dollar and the ruble. Such operations are not quoted on the market, so the dollar cross rate can serve as an exit here. And here the scheme is quite simple: rubles are bought, they are exchanged for dollars, and then US dollars are exchanged for Hong Kong dollars. And here a couple of courses are used at once.
- Indirect way. At the same time, the dollar serves as a cross-currency for one of a pair of currencies, for example, from a pair of ruble and pound sterling, it belongs to the second. The operation is performed by multiplying the dollar rates of these two currencies by each other.
- The specific method assumes that the dollar refers to both currencies of the pair, so for the calculation you need to divide one by the second.
Euro settlements
There is a similarity with dollar calculations, but with some differences. However, there is also a simplified scheme, most often used by dealers. It includes the following:
- Find the average selling and buying of each currency against the euro.
- Through calculations, the current average cross-rate of the euro is determined.
- The average value of the euro is expanded in both opposite directions to fix the spread value. And this allows you to get the value of the exchange rate of both buying and selling according to the euro cross rate.
Meaning
The formation of a separate type of instrument, such as cross-rates, is not a spontaneous decision. In fact, transactions in which the position of the dollar is not a priority have a whole range of advantages in use. To understand this, you need to slightly abstract from the principles of the Forex currency exchange as an international structure, and consider the benefits of this tool for individual financial structures and corporations engaged in trading outside their state.
To successfully conduct an economic analysis, it is very important to know about the state of the oil, gas and industrial raw materials market. The priority currency for international cooperation is the US dollar. And this is understandable, because, despite the current situation, the United States is considered the most economically developed country. But the dollar is characterized by periodic fluctuations. That is why it is bestcarry out transactions involving the currencies of other states in which the economy is much more stable at the time of trading. That is why the ruble cross rate is gradually becoming more and more popular.
Certain usage nuances
For the correct choice of this instrument, it is necessary to study the economic situation of the country, and for this, a system of currency indices is traditionally used. This method is universal, since the number of cross-operations performed so far remains at a rather modest level. This is especially true for certain exotic currencies.
Conclusions
Cross-rates are a type of transaction that is excellent for time zones, and is also characterized by a high degree of efficiency in currency exchange. This tool is of great importance for the commercial and industrial sectors of the economies of countries, since the fewer opponents involved in such transactions, the better.
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