Cross Pairs – Capitalco.net

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Cross Currency Pairs

What Are Cross Pairs ?

A cross currency pair refers to foreign exchange of one that consists a pair of currencies that does not include the U.S. dollar. Common cross currency pairs involve the EU euro, the British pound and the Japanese yen.

Understanding Cross Currency

At the end of the Second World War, most currencies were pegged and quoted against the U.S. dollar. This was because the U.S. economy in general was the strongest post-war and its currency was fixed to gold. This set precedents when converting two currencies that weren’t U.S. dollars. Historically, an individual who wished to exchange a sum of money into a different currency would be required first to convert that money into U.S dollars and then convert it into the desired currency.

Nowadays a cross currency pair is one that consists of a pair of currencies traded in forex that does not include the U.S. dollar. Common cross currency pairs involve the EU euro, the British pound and the Japanese yen.

Calculating Cross Currency

In this section, we will show you how to calculate the bid (buying price) and ask (selling price) of a currency cross.
Let’s say we want to find the bid/ask price for GBP/JPY. The first thing we would do is look at the bid/ask price for both GBP/USD and USD/JPY.

Why these 2 pairs ? Because both of them have the U.S. dollar as their common denominator. These 2 pairs are called the “legs” of GBP/JPY because they are the U.S. dollar pairs associated with it.

Now let’s say we find the following bid/ask prices :

GBP/USD: 1.5630 (bid) / 1.5635 (ask)

USD/JPY: 89.38 (bid) / 89.43 (ask)

To calculate the bid price for GBP/JPY, you simply multiply the bid prices for GBP/USD and USD/JPY.
If you got 139.70, good job !

To get the ask price for GBP/JPY, just multiply the ask prices for GBP/USD and USD/JPY and we get 139.82.