What is a Cross Currency?
A cross currency refers to a currency pair or transaction that does not involve the U.S. dollar. A cross currency transaction, for example, doesn't use the U.S. dollar as a contract settlement currency. 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 euro 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. Cross currency transactions could be done under this system, but they sometimes still went through a U.S. dollar calculation to ensure fair settlement. Although the U.S. dollar still acts as the world reserve currency, the rise of the forex market has made cross currency transactions and cross currency pairs common. The GBP/JPY cross, for example, was invented to help individuals in England and Japan who wanted to convert their money directly without having to first convert it into U.S dollars.
Advantages of Cross Currency Pairs and Transactions
Since the end of the gold standard and the increase of global trading at a wholesale level,cross currency transactions are part of every day financial life. Not only do cross currency transactions make it easier for international payments, but they have also made them markedly cheaper. Because an individual does not have to swap the currency into U.S. dollars first, there is only one transaction, meaning only one spread is crossed. Furthermore, because non-USD pairs are now more commonly traded, the spreads have tightened making it even cheaper to move from one currency to another.
Cross Currency Pairs in Forex Trading
Cross currency pairs can be excellent tools for forex traders. Some cross currency trades can be set up to position traders on particular world events, such as using the EUR/GBP to bet on the ongoing Brexit saga. The same trade would be more complex and capital intensive setting up separate positions with the USD/GBP and USD/EUR, but this method is still used to create exotic cross currency pairs that are not widely traded. Common cross currency rates involve the Japanese yen. Many traders take advantage of the carry trade where they own a high yielding currency like the Australian dollaror the New Zealand dollar and short the Japanese yen - the low yielding currency.
FAQs
Simply put, a cross-currency pair consists of any two currencies traded on forex, excluding the US Dollar. For example, a EUR/GBP pair would be considered a cross-currency pair. Namely, there are two types of cross-currency pairs known in the forex trading world: minor currency pairs and exotic currency pairs.
What is an example of a cross currency? ›
With the invention of currency crosses, individuals can now bypass the process of converting their currencies into US dollars and simply convert it directly into their desired currency. Some examples of crosses include GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.
What is the cross currency method? ›
Cross-Currency Swaps are contracts in which two parties exchange notional amounts in different currencies and make payments based on fixed or floating rates relative to these notionals.
What is an example of a cross rate currency? ›
The cross rate should equal the ratio of the two corresponding pairs; therefore, EUR/GBP = EUR/USD divided by GBP/USD, just like GBP/CHF = GBP/USD × USD/CHF.
What is a cross currency payment? ›
Cross-currency payment - A cross-currency payment refers to the entire transactions chain which results in the debiting of an account in one currency and the crediting of an account in another currency.
How do you avoid cross currency charges? ›
Use a Forex Card
A forex card, also known as a travel card, is a prepaid card loaded with foreign currency. Using a Forex card for international transactions can help you avoid Forex charges. Simply load the card with the currency you need before travelling.
What are the benefits of cross currency? ›
Cross-currency swaps are very flexible. They can be tailored to the specific needs of a company and help in three primary ways: possibly lowering interest cost and qualifying for favorable accounting treatment, as well as helping to manage currency risk.
What really is the cross currency basis? ›
We define cross-currency basis as the difference in value between 1) the exchange price of a FX forward contract and 2) the theoretical price of the same FX forward contract according to covered interest parity, derived from the current spot price and the individual interest rates of the two currencies involved in the ...
What are the risks of cross-currency swap? ›
The risk of a cross currency swap relates to the future development in short and long-term interest rates, cross currency basis and exchange rate movements between the two currencies.
What is a cross-currency swap for dummies? ›
In a cross-currency swap, the two parties agree to exchange both the principal amounts and interest payments in different currencies. The principal amounts are typically exchanged at the prevailing spot exchange rate, while the interest payments are based on predetermined floating or fixed interest rates.
To calculate the Cross Rate, divide the quote currency by the base currency on the opposite side. The below table will help you derive the rate for a cross-currency pair, say, JPY/AUD. Calculate the Cross Rate by multiplying the quote currency with the base currency on the same side.
What does cross currency usage mean? ›
What is Cross Currency? Cross currency means a currency pair or transaction that does not involve the US dollar. A cross-currency transaction does not use the US dollar as the contract settlement currency. A cross currency pair is one that has a pair of currencies traded in forex that is not inclusive of the US dollar.
What is the cross currency mechanism? ›
Cross currency swap refers to an agreement between two parties to trade currencies. Over the duration of the swap, the interest payments are exchanged periodically, with the equal value principal exchanged at the origin and maturity.
Is PayPal a cross currency? ›
You can send and receive money in multiple currencies with PayPal.
What is cross currency option? ›
What is a Cross Currency? A cross currency refers to a currency pair or transaction that does not involve the U.S. dollar. A cross currency transaction, for example, doesn't use the U.S. dollar as a contract settlement currency.
What is cross currency fee? ›
Cross currency fee: 3.5% + GST (applicable for all transaction types) Cross currency transaction: A transaction when billing currency is different from the currency on card.
What are currency crosses? ›
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 euro and the Japanese yen.
What is an example of a cross-currency swap hedge? ›
Cross-currency swaps defined
For example, a company might enter an agreement with a hedge bank to receive a certain notional of USD at a fixed interest rate in exchange for paying a specified EUR notional at a different interest rate. Importantly, each leg of the transaction could be a fixed or floating rate.
What is an example of a cross pair? ›
Simply put, a cross-currency pair consists of any two currencies traded on forex, excluding the US Dollar. For example, a EUR/GBP pair would be considered a cross-currency pair. Namely, there are two types of cross-currency pairs known in the forex trading world: minor currency pairs and exotic currency pairs.
