It used to be the case that someone who wanted to convert their currencies would first need to convert their domestic currency into US Dollars before they could trade them for another currency. If someone wanted to convert their Swiss Francs into Japanese Yen, they would first need to purchase US Dollars to do so. This is no longer the case. Cross currencies allow traders and individuals to convert currencies directly.
Examples of crosses include GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.
Essentially, a currency cross pair is one that does not include the U.S. dollar.
Cross Currency Rate Calculation
If you wanted to figure out what the cross currency rate for the EUR/JPY is, then you would need to look at both the EUR/USD and USD/JPY. These are called the legs of the EUR/JPY. This is the only way that you could see definitively how much the EUR/JPY cross currency pair should be trading for. The reason why this is a necessity is simply because they both use the USD as a common currency between them.
To calculate the bid price of the EUR/JPY pair, you will multiply the bids for the EUR/USD and the USD/JPY. That will give you the accurate bid price at any given time. It is also possible to use the same calculation on the ask price to figure out what that should be for the cross currency pair.
Here’s an example:
If the bid/ask for EUR/USD is 0.9800/0.9803 — and the bid/ask for USD/JPY is 144.71/144.78… How do you calculate the bid price for EUR/JPY? Simply multiply the bid for EUR/USD by the bid for USD/JPY, which yields 141.816.
When you know what the bid and ask price ought to be for the cross currency pair, then you are all set to make your determinations about how much you will receive when you convert your currency across pairs.
This has made it easier for people to get their currencies converted quickly and effectively when they need to. That makes it both more likely that they will bother to get those currencies converted at all, and it makes it more effective for them when they do so. This is the system that the vast majority of people prefer, and it is the best way to keep money circulating throughout the economy the way that it needs to.