Cross Rate Transactions
Cross-rate transactions occur when two currencies are equal which follows from their forex currency exchange rate according to a forex rate of the third currency. There are a couple of ways that cross rate transactions can be executed. First, some FDMs will actually offer these pairs. Second you can buy EUR/USD and then USD/JPY to affect a EUR/JPY cross.
Currency pairs that do not involve the USD are referred to as cross rates. Even though the USD is not represented in the quote, the USD rate is usually used in the quote calculation. An example of a cross rate is the EUR/GBP.
→ EXAMPLE: Assume that the following major exchange rates are known:
EUR/USD = 1.0060/65
GBP/USD = 1.5847/52
USD/JPY = 120.25/30
USD/CHF = 1.4554/59
→ CALCULATE GBP/CHF:
GBP/USD: Bid: 1.5847 Offer: 1.5852
USD/CHF: 1.4554 1.4559
GBP/USD X USD/CHF = 1.5847 X 1.4554 1.5852 X 1.4559
Source: www.forexrealm.com
Study Guide >> Forex Trading Calculations >> Cross rate transactions
10 Comments
Huh???
Can someone explain the formula in a layman’s terms, please?
Hi David,
We are actively revising the information here so it will be more useful for those taking the exam. Please look back soon.
Regards,
Bart
I had one of these on my exam. Questions was framed as such
You have a customer who believes the polish zolty is going appreciate in value. The customer has 25,000 on depost and wants to trade $500,0000. Only the FDM does not offer a USD/PLN only a EUR/PLN. At the time that your customer wants to by the PLN, the rates are as follows.
EUR/USD 1.2975/1.2978
EUR/PLN 3.2459/3.24675
Later when your customer closes the position, the rates are as follows.
EUR/USD 1.2852/1.2855
EUR/PLN 3.2444/3.2461
From this you had to calculate the profit or loss
In this example we take the 500,000 USD, divdie by the EUR/USD (buying EUR/USD) offer rate 1.2978 to get the number of EUROS. 385,267.38. We then multiply the number of EUROS by the Bid of the EUR/PLN rate (selling EUR/PLN) 3.2444 to get 1,249,961.47 PLN. Now at at later date we calcualte the what those are worth in USD, so we divide by the EUR/PLN offer (buying EUR/PLN)3.2461to get 385,065.61 Euros. The next step is to convert back to USD so we multiply by the EUR/USD (selling EUR/USD)bid 1.2852 to get 494,886.32 or a loss of 5,113.68.
Hope this helps.
Jantz,
I believe you meant made an accidental mistake in your calculation. When converting from EUR to PLN you used the rate at the later date. Was this done on purpose? I found a loss of about 4884 USD.
Is this correct?
I got a loss of $6300…
You buy EUR/USD at 1.2978 on the offer and later sell on the bid of 1.2852 for a loss of 1260 (100,000 lot) *5 lots (for the 500,000) equals a loss of 6100.
You sell EUR/PLN at the bid of 3.2459 and buy back at the offer 3.2461 a loss of $200…
Total loss $6300…
I’m sorry the loss would be $6200…
The loss on the EUR/PLN is only $100, for a total loss of $6200…
Sorry I did make that mistake. I did not mean to use the later dates rate…just and error on my part you should use the 3.2459 selling eur buing pln to get 1,250,539.37 PLN then at the later date you convert back to dollars by buying EUR/PLN and then selling EUR/USD… (1,250,539.37/3.2461=385,243 EUROS X 1.2852=495,115.122 USD) All told there would be a loss of 500000-495,114=$4,884.87.
When you execute a spot forex transaction you are long/positive (+) one currency, and short/ Negative (-) the other. It may be helpful for you to think of this in terms of a balance sheet instead of a position in the market I will use the EUR/USD/PLN cross rate transaction/triangle example from above (3. Jantz Hoffman):
ENTRY EXIT
EUR/USD /1.2978 EUR/USD 1.2852/
EUR/PLN 3.2459/ EUR/PLN /3.2461
Market entry:
USD amount divided by the ask price = EUR amount, and
EUR amount multiplied by the bid Price = PLN amount.
Market exit:
PLN amount divided by the ask price = EUR amount, and EUR amount multiplied by the bid price = USD amount.
To calculate the P&L subtract the second USD amount from the first as the question asks you to Sell USD/PLN
Balance Sheet
USD EUR PLN
Entry -500,000.00 -385,065.61 0.00
Entry 0.00 +385,065.61 +1,250,539.39
Exit 0.00 +385,243.64 -1,250,539.39
Exit +495,115.13 -385,243.64 0.00
Sum
Totals -4,884.87 0.00 0.00
Very tough question to answer in 1.5 minutes.
the formatting did not turn out in my earlier post as it should have 2 columns under ENTRY EXIT, and four columns under Balance Sheet.
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