Crosses in forex
Family I · Instruments
Not to be confused with forex, majors in forex, majors in forex.
Crosses in forex are currency pairs that exclude the US dollar from both legs, for example EUR/GBP, GBP/JPY or AUD/NZD. Their prices are not set by direct interbank dealing in the same way as major dollar pairs; instead they are typically calculated from the two relevant dollar pairs. The exact set of pairs labelled a cross varies by broker and by convention, with some venues treating euro-quoted pairs as a separate category.
How a cross rate is derived
A cross rate is obtained by combining the exchange rates of the two component currencies against a common third currency, usually the US dollar. If both component pairs are quoted with the dollar as base, the cross rate is the ratio of the two dollar rates; if one is quoted with the dollar as quote currency, the calculation is inverted first.
The result is a synthetic price. Because it is derived rather than directly dealt, the quoted cross rate can differ slightly from the rate at which a dealer would actually transact, and the difference is wider when the underlying dollar pairs are less liquid.
Worked example
Suppose a dealer needs a EUR/GBP rate and observes the following dollar pairs: EUR/USD 1.0850 and GBP/USD 1.2650. Both have the dollar as quote currency, so the cross rate is the first divided by the second.
The synthetic EUR/GBP rate is therefore approximately 0.8577. A dealer quoting a tradable price would add a spread around this derived mid-rate.
Liquidity and quotation conventions
Crosses generally trade with wider spreads and less depth than the major dollar pairs, because the underlying dollar legs must be executed to hedge or fill an order. The most actively traded crosses involve the euro, the yen, sterling, the Swiss franc, the Australian dollar and the New Zealand dollar.
Quotation conventions differ by pair and by venue: some crosses are quoted with a particular currency as the base by market convention, and the number of decimal places varies with the pair. Traders should confirm the convention used by their venue rather than assuming a single global standard.
Often confused with
- forex
- Forex is the global over-the-counter market where national currencies are exchanged in pairs, with prices quoted as the amount of one currency required to buy another.
- majors in forex
- Majors in forex are the most heavily traded currency pairs, typically those pairing the US dollar with the euro, Japanese yen, British pound, Swiss franc, Canadian dollar, Australian dollar, or New Zealand dollar.
- majors in forex
- The most actively traded currency pairs in the foreign exchange market, typically comprising the US dollar against the euro, Japanese yen, British pound, Swiss franc, Canadian dollar, Australian dollar and New Zealand dollar.