The forex market’s most actively traded currency pairs all include the U.S. Dollar, and those pairs tend to be where the greatest liquidity exists in the forex market. Nevertheless, many other currency pairs which do not involve the U.S. Dollar offer ample trading opportunities. These are usually referred to as the cross currency pairs or just the crosses, and their quotes are called cross rates.
The most actively traded crosses or cross currency pairs in the forex market are further divided into the Major Crosses and the Minor Crosses.
The Major Crosses
The currency pairs referred to as the Major Crosses consist of the most actively traded currency pairs which exclude the U.S. Dollar.
Most of these cross currency pairs have dedicated Interbank market makers and brokers and include the following currency pairs listed in alphabetical order:
- EUR/CHF, see real time chart
- EUR/GBP, see real time chart
- EUR/JPY, see real time chart
- GBP/JPY, see real time chart
The Minor Crosses
The Minor Crosses, as the name implies, make up the less active cross currency pairs that generally do not have dedicated Interbank market makers or brokers.
Nevertheless, the Minor Crosses remain popular among forex traders and offer significant trading opportunities since they can show prolonged trends.
The currency pairs which make up the Minor Crosses include the following:
How to Compute Cross Rates
When a retail forex trader decides to take a cross position in EURAUD using U.S. Dollar quoted rates, they may need to compute the correct cross rate bid and offer prices.
Consider the following major exchange rates that are quoted as follows:
EURUSD = 1.2500/05
AUDUSD = 0.9000/05
To compute EURAUD, you can first separate the quotes for greater clarity:
AUDUSD: Bid: 0.9000 Ask: 0.9005
EURUSD: Bid: 1.2500 Ask: 1.2505
The overall objective here is to determine how many Australian Dollars it will take to buy one Euro in order to determine the EURAUD cross rate
To obtain the bid rate for the cross to start with, you will want to sell Euros on the bid side of the quote at 1.2500 while you will at the same time be buying Australian Dollars on the offer side at 0.9005. These will both be done in equal amounts of U.S. Dollars, so both spreads will be crossed as a result.
Therefore, you will obtain a bid rate for the cross of:
(1.2500 EURUSD) / (0.9005 AUDUSD) = 1.3881 bid for EURAUD
Conversely, on the offer side of the quote, the transaction will involve buying Euros at 1.2505 and selling the Australian Dollar at 0.9000, also in equal amounts of U.S. Dollars and crossing both spreads.
This yields an offer rate for the EURAUD cross as follows:
(1.2505 EURUSD) / (0.9000 AUDUSD) = 1.3894 offer for EURAUD
The results of the calculation would give a two way market for EURAUD of 1.3881 to 1.3894.
You will note the rather wide dealing spread of 13 pips that includes both the spread for EURUSD and the spread for AUDUSD. This spread will sometimes be narrowed if you can deal the more actively traded crosses directly rather than through their component currencies quoted versus the U.S. Dollar.
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