loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

What are Cross Currency Pairs?

Introduction

The US Dollar is the most owned currency in the world. So in a way, it makes sense that a majority of currency trading takes place in relation to the US dollar. However, some forex transactions may happen between other currencies. When the US dollar is not involved in currency trade, it is called a cross-currency pair.

Understanding currency pairs

The forex market or foreign exchange market is where currency trading happens. One currency may be traded out for another currency by a big bank, corporation, forex traders or institutional investor. Converting one country’s currency to another result in currency pairs. For instance, let’s assume you want to convert the Euro to US Dollars. This currency pair is represented as EUR/USD. 

The first currency is the base or transaction currency. The second currency is called the quote currency. In the EUR/USD currency pair, EUR is the base currency, and USD is the quote currency. When writing this article, the EUR/USD quotes was at 1.0967. That means that 1 EUR is worth 1.0967 USD or you need to pay 1.0967 USD to buy 1 Euro.

Additional Read: A comprehensive guide to Currency Market

The emergence of cross currency 

After World War II, growing international trade necessitated a forex market where currencies could be exchanged. Since the US economy emerged as the strongest globally, naturally, most currencies were exchanged in terms of the US dollar. However, as globalisation proliferated and trade among different countries began expanding, there was a need to exchange other currencies. 

Initially, any currency trade required the US Dollar as an intermediary. If the Euro had to be exchanged for Japanese Yen, the trader would first have to exchange Euro for US Dollars and then use the US dollars to purchase Japanese Yen, thus requiring two transactions. 

However, in light of the rapidly expanding forex market in recent years, cross-currency pairs have emerged. That is where currencies can be exchanged directly without involving the US Dollar. 

Calculating cross currency pair rates

Although the US dollar is not directly involved in cross-currency pair transactions, it is still used to calculate cross currency pair rates. That’s because the US Dollar is the most traded currency globally. Let’s understand the calculation of cross-currency pair rates with an example. 

Say you want to exchange the Pound Sterling for the Japanese Yen. This cross-currency pair would be represented as GBP/JPY. GBP is the base currency, and JPY is the quote currency. To arrive at the rate for this cross currency pair, you would first need the GBP/USD quotes. Then you would need the USD/JPY quotes. You will arrive at the GBP/JPY cross currency pair rate by multiplying the two. 

Additional Read: Benefits of Forex and Currency Trading

Conclusion 

Currency trading is a vital component of financial markets, used for various purposes such as hedging, speculation and diversification. While the US Dollar was an essential part of all currency pairs, given its gold standard, globalisation led to abolishing the gold standard and, consequently, the need for US Dollars to calculate currency pairs. Cross-currency pairs allow seamless currency trading without relying on the US Dollar.

Disclaimer:- ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Composite Corporate Agent License No.CA0113, AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. We are distributors of Insurance and Mutual funds, Corporate Fixed Deposits, NCDs, PMS and AIF products. We act as a Syndicate, Sub -syndicate member for IPO, FPO. Please note that Mutual Fund Investments are subject to market risks, read the scheme related documents carefully before investing for full understanding and detail. . ICICI Securities Ltd. acts as a referral agent to ICICI Bank Ltd., ICICI Home Finance Company Limited and various other banks / NBFC for personal finance, housing related services etc. & the loan facility is subjective to fulfilment of eligibility criteria, terms and conditions etc. NPS is a defined contribution plan and the benefits would depend upon the amounts of contributions invested and the investment growth up to the point of exit from NPS. Insurance is the subject matter of solicitation. ICICI Securities Ltd. does not underwrite the risk or act as an insurer. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.
The non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.