Understanding the Meaning of Cross Currency

Cross currency refers to a currency pair that doesn’t involve US dollar as one of its components. Mostly used cross currency pairs are EUR/JPY, EUR/GBP and EUR/CHF. These currency pairs lack in popularity when compared to the majors i.e. the currency pairs that include US dollars as one of its components. To know more about this click here.

Bidding and Selling

In all the trading markets that are present buying (bidding price) and selling prices (ask price) of a currency par play a major role in their development. Make a note that these are related to the base currency in the quote. When you plan to buy a currency, the selling price refers to the amount for which the market is willing to sell one unit of the currency that you want to buy. In simpler words how much of the quoted currency has to be paid to buy 1 unit of the base currency.

When you are planning to sell a currency pair you’ll see how much of the quoted currency you will obtain while selling one unit of the base currency. In simpler words how much will the market pay in base currency for the quoted currency. In the quote component before the slash is the bid price and 2 digits after it denotes the ask price. Bid price is always smaller than that of the ask price. Considering an example:

USD/CAD =1.2000/05, where Ask price = 1.2005 and bid = 1.2000

If you are planning to buy this very currency pair, it means that you want to buy the base currency i.e. the Canadian dollar and are looking at the ask price to see how much in Canadian dollars will the market charge for 1 U.S. dollars. So, here you can buy 1 U.S dollar with 1.2000 Canadian dollars. Similarly to sell this very currency pair, or to sell base currency in the exchange of the quoted currency, you’ll see the bid price which will tell you that the market will buy US dollar 1 base currency i.e. you will sell to the market the base currency at a rate equivalent to 1.2000 Canadian dollars, which is nothing but the quoted currency.

No matter which currency is quoted first the base currency will always be the one in which the transaction has to be conducted. So, you either sell the base currency or buy the base currency. Depending on which currency you want to trade you check the corresponding currency pair in the spot exchange rate to decide the price. To know more about currency pairs and their dependencies click here.

There are few other technical terms used in Forex related to the ask price and the bid price, they are: Pips and Spreads. A spread is the difference between the bid price and the ask price. Considering an example of a quote: EUR/USD = 1.2500/03, the spread will be 0.0003 or 3 pips. Pips are also known as points. Even the smallest change in points can result in thousands of dollars being lost or made because of the leverage. This is one of the major reasons why the speculators are so fascinated with the forex market since, even the smallest of the price movement can lead to a profitable outcome.

The smallest amount a price can move in any currency code is called as pip. Considering an example of Euro, Swiss franc, British pound and US dollar one pip can be mapped to 00001, and with yen it can be mapped to 0.01 as the Japanese yen is mapped to only 2 places from the decimal. Currencies generally trader within a range of 100 to 150 pips a day.

Currency pairs in the Forwards and Futures Markets

One of the vital technical differences when it comes to different forex markets is the way the currencies are quoted. Forward and future markets always quote their foreign currencies against the U.S. dollar. So, the pricing is done in line with how many U.S. dollars are needed to by one unit of other currency or how many dollars you will be getting when you are selling your currency. Make a note that in the spot market few of the currencies are quoted against the U.S. dollar, in other cases U.S. dollar is quoted against them. So, finding similarities between the spot market’s currency pair and future or forwards currency pair is a little challenging task.

Remember that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/futures market and the spot market quotes will not always be parallel one another.

Considering an example a scenario for currency pair quote being same for both the
markets i.e. Spot market and forwards/ future market:

In spot market, British pound is usually quoted against U.S dollar like GBP/USD For example, in both the spot market and forwards/ future market; the British pound is quoted against the U.S. dollar as GBP/USD in the same way. So, if the British pound against the U.S. dollar strengthens in spot market it will strengthen in the forwards/ future market as well.

In another case, when you look at the exchange rate of the Japanese yen and U.S. dollar, the later is quoted against the former. In spot market, the quote could be 115 which means that one U.S. dollar will buy you 115 Japanese yen. In the futures market, it the same will be quoted as (1/115) or .0087, which means that 1 Japanese yen will buy you .0087 U.S. dollars. So, a rise in the USD/JPY spot rate would associate to the decline in the JPY in the futures rate as the U.S. dollar might have strengthened against Japanese yen and hence one Japanese yen would buy you a little less than a U.S. dollar. To know more such statistics click here.