Forex Transactions are carried out not only against the US dollar, although so far we intentionally did not consider these operations in order to simplify the presentation of the site. Exchange rates, which do not present the US dollar are called cross-rates (cross rates). On the cross rates forex, they tend to work only experienced traders as to work effectively with them the need to deepen the knowledge of economic indicators and indicators of individual countries. As an example of cross-exchange quotations can bring quote the British pound to the Japanese Yen (GBP / JPY), the quotation of Euro to Japanese Yen (EUR / JPY), or quotation of the British pound to the euro (GBP / EUR).
For major (dollar) quotations of currencies in a position they are strictly defined. The positions in the cross-currency exchange rate quotes may vary depending on the part, which gives a quote. For example, Bank of Canada can give a quotation of the Canadian dollar against the Euro as the CAD / EUR, and the bank in Europe can give a quote as the EUR / CAD. This nuance should be considered when making transactions on the cross-rates, so as not to take a false decision of purchase / sale.As an exception, you can lead the British pound, which in cross-rates are always quoted as GBP / ___, then there is always the base currency.
Why are cross-rates of interest on Forex? Imagine a situation where you expect high economic growth in Canada, caused by the development of new oil fields (Canada - one of the major oil exporters in the world ). At the same time the output of the next economic indicator in Japan indicates a temporary decline of the Japanese economy. Since the state of the economy is directly proportional to the value of its currency in the world currency market, it is obvious that it is necessary to purchase Canadian dollars (CAD) and sell Japanese Yen (JPY). But if you perform such operations against the US dollar, you can get mixed results. The dollar may rise as the price and fall, as precise data on the state of the US economy, we can not have. Therefore, the purchase of Canadian dollars for US dollars (according to the quotation USD / CAD) may not produce the expected profits, even as sales of Japanese Yen per US dollar (for the quotation USD / JPY). If you make these operations at the same time with the same size of the transaction, it is as if we exclude the US dollar from the "equation" and is no longer dependent on the economic condition of the US economy. This effect we achieve by working with the forex cross rates - as if we exclude the impact of the US economy to change the direction of interest rate currencies.
The vast majority of transactions in the Forex - a major operation (dollar) quotations. Market as cross rates in Forex is much less liquid. Therefore, the quotations of cross-rates are not calculated in relation to demand and supply of currencies relative to each other, as is the case with the basic quotations. Otherwise, the market cross rates would have made speculative, and some of its participants could fully control it. Thus, despite the fact that the US dollar is not present in the quotations of cross-rates, calculated cross-rates it is on the main quotations in USD.
So how cross rates calculated? There are three possible ways to calculate the cross-rates, depending on whether you favor the US dollar base or quote currency in the main quotes of interest rates. At the same time we will use the simple rules of multiplication and division of fractions, we know from school mathematics. At the same time perceive writing USD / JPY quotation just as a fraction, of course, should not be. After all, if a record quotes the Japanese Yen against the US dollar would have portrayed a real shot, then the value 104.78 quotes (number of Japanese Yen per US dollar) would be consistent with the spelling quotes like JPY / USD. In practice, as we know, using the reverse spelling of USD / JPY.
The first type of calculation is used for direct quotations of currencies against the US dollar (the US dollar is the base currency for both currencies). Consider the Japanese Yen (JPY) and Swiss franc (CHF). With quotes in relation to the US dollar USD / JPY and USD / CHF is possible, using the properties of fractions, to bring the cross-rate of the Swiss franc to Japanese Yen:
CHF / JPY = USD / JPY: USD / CHF,
that is, you must divide the dollar quotation of Japanese Yen, the dollar quotation on the Swiss franc. With, for example, USD / JPY 104.78 and USD / CHF 1.0505, the cross-rate to the Swiss franc, the Japanese Yen is (rounded) is CHF / JPY 99.74.
The second type of calculation is used for currencies with forward and reverse quotations against the US dollar (the US dollar is the base currency for a single currency and the quote currency quotes for the other). Consider the Japanese Yen (JPY) and Australian dollar (AUD). With quotes in relation to the US dollar USD / JPY and AUD / USD is possible, using the properties of fractions, to bring the cross-rate of the Australian dollar to Japanese Yen:
AUD / JPY = AUD / USD * USD / JPY,
that is necessary to multiply the dollar quotation of the Australian dollar in the dollar quotation of Japanese Yen. With, for example, USD / JPY 104.78 and AUD / USD 1.0564, the cross-rate of the Australian dollar to the Japanese Yen will (rounded) equal AUD / JPY 110.69.
The third type of calculation is used for currencies to reverse quotations against the US dollar (the US dollar is the quote currency quotes for both currencies). Consider the British pound sterling (GBP) and Australian dollar (AUD). With quotes in relation to the US dollar GBP / USD and AUD / USD is possible, using the properties of fractions, lead cross-rate of the British pound to the Australian dollar:
GBP / AUD = GBP / USD: AUD / USD,
that is, you must divide the dollar quotation of the pound sterling to the dollar quotation of the Australian dollar. With, for example, GBP / USD 0.5028 and AUD / USD 1.0564, the cross-rate of the British pound to the Australian dollar will (rounded) is GBP / AUD 0.4760.
It should be noted that for ease of calculation formulas, we excluded from consideration of the concept of the purchase price (bid) and selling price (ask) quotes rates and still use only the current (spot) price. But every major (dollar) quotation has two prices, and calculates the cross-exchange rate quotation also has two prices - the so-introduced into the formula where the purchase price, and where the sale price? The answer to this question lies in understanding the logic of calculating cross rates. Returning to the example of the first type of calculation with the Swiss franc (CHF) and Japanese yen (JPY). We are interested in a cross-exchange rate quotation CHF / JPY. To determine the rate of purchase of the Swiss franc in a quote (rates of purchase / sale, as we know, always refer to the base currency) have to argue as follows. We are interested in buying the Swiss franc, it means we must first buy dollars for Japanese yens, and then sell them for Swiss francs. Thus, in USD / JPY quotation course we are interested in buying, and in the quotation USD / CHF selling rate. So buying rate of the Swiss franc against Japanese yen in the quotation of the cross-rate CHF / JPY is calculated as follows:
CHF / JPY (bid) = USD / JPY (bid): USD / CHF (ask)
Similarly, we can calculate the formula for the selling rate of the Swiss franc against Japanese yen in the quotation of the cross-rate CHF / JPY:
CHF / JPY (ask) = USD / JPY (ask): USD / CHF (bid)
For examples of the second and third type of calculation formulas are calculated analogously:
AUD / JPY (bid) = AUD / USD (bid) * USD / JPY (bid),
AUD / JPY (ask) = AUD / USD (ask) * USD / JPY (ask),
GBP / AUD (bid) = GBP / USD (bid): AUD / USD (ask),
GBP / AUD (ask) = GBP / USD (ask): AUD / USD (bid).
It is worth noting that dealers practically do not use these formulas because of their bulkiness. There are more convenient standard way of calculating the buying and selling rates in the quotations of cross-rates at the Forex. This method is as follows. Take the average of the buying and selling rates for each dollar quotations. Then, using the formula for the current (spot) price, calculated the current value of cross-exchange quotes.This value is then "extendible" in opposite directions at a certain number of points (set spread), and thus obtained buying and selling for cross exchange quotation.
Consider the example of Swiss Francs (CHF) and Japanese yen (JPY). Assuming rates of purchase / sale of the currencies against the US dollar following: USD / CHF 1.0502 / 08 and USD / JPY 104.74 / 82. Calculate the average rates:
USD / CHF (avg) = (1.0502 + 1.0508) / 2 = 1.0505,
USD / JPY (avg) = (104.74 + 104.82) / 2 = 104.78,
which are then used in the formulas for calculating quotations of cross-rates for the current (spot) price. The calculated value thus CHF / JPY (avg) 99.74 then "moved apart", say 5 points in both directions, forming a course of buying and selling CHF / JPY 99.69 / 79.
It must be remembered that in such a simplified method of calculation, there are pitfalls. Since money on Forex is earned on the opposite (overlapping) transactions, the value of the spread should be large enough to avoid losses during the reverse transaction with another counterparty.This is especially important for less liquid markets, "exotic" cross rates.
Summarizing the chapter say that the analysis and forecasting of the cross-rates is no different from the analysis and forecasting of core courses in relation to the US dollar, ie, They use the same tools, which will be mentioned in the section School Forex Portal forexanewway
For major (dollar) quotations of currencies in a position they are strictly defined. The positions in the cross-currency exchange rate quotes may vary depending on the part, which gives a quote. For example, Bank of Canada can give a quotation of the Canadian dollar against the Euro as the CAD / EUR, and the bank in Europe can give a quote as the EUR / CAD. This nuance should be considered when making transactions on the cross-rates, so as not to take a false decision of purchase / sale.As an exception, you can lead the British pound, which in cross-rates are always quoted as GBP / ___, then there is always the base currency.
Why are cross-rates of interest on Forex? Imagine a situation where you expect high economic growth in Canada, caused by the development of new oil fields (Canada - one of the major oil exporters in the world ). At the same time the output of the next economic indicator in Japan indicates a temporary decline of the Japanese economy. Since the state of the economy is directly proportional to the value of its currency in the world currency market, it is obvious that it is necessary to purchase Canadian dollars (CAD) and sell Japanese Yen (JPY). But if you perform such operations against the US dollar, you can get mixed results. The dollar may rise as the price and fall, as precise data on the state of the US economy, we can not have. Therefore, the purchase of Canadian dollars for US dollars (according to the quotation USD / CAD) may not produce the expected profits, even as sales of Japanese Yen per US dollar (for the quotation USD / JPY). If you make these operations at the same time with the same size of the transaction, it is as if we exclude the US dollar from the "equation" and is no longer dependent on the economic condition of the US economy. This effect we achieve by working with the forex cross rates - as if we exclude the impact of the US economy to change the direction of interest rate currencies.
The vast majority of transactions in the Forex - a major operation (dollar) quotations. Market as cross rates in Forex is much less liquid. Therefore, the quotations of cross-rates are not calculated in relation to demand and supply of currencies relative to each other, as is the case with the basic quotations. Otherwise, the market cross rates would have made speculative, and some of its participants could fully control it. Thus, despite the fact that the US dollar is not present in the quotations of cross-rates, calculated cross-rates it is on the main quotations in USD.
So how cross rates calculated? There are three possible ways to calculate the cross-rates, depending on whether you favor the US dollar base or quote currency in the main quotes of interest rates. At the same time we will use the simple rules of multiplication and division of fractions, we know from school mathematics. At the same time perceive writing USD / JPY quotation just as a fraction, of course, should not be. After all, if a record quotes the Japanese Yen against the US dollar would have portrayed a real shot, then the value 104.78 quotes (number of Japanese Yen per US dollar) would be consistent with the spelling quotes like JPY / USD. In practice, as we know, using the reverse spelling of USD / JPY.
The first type of calculation is used for direct quotations of currencies against the US dollar (the US dollar is the base currency for both currencies). Consider the Japanese Yen (JPY) and Swiss franc (CHF). With quotes in relation to the US dollar USD / JPY and USD / CHF is possible, using the properties of fractions, to bring the cross-rate of the Swiss franc to Japanese Yen:
CHF / JPY = USD / JPY: USD / CHF,
that is, you must divide the dollar quotation of Japanese Yen, the dollar quotation on the Swiss franc. With, for example, USD / JPY 104.78 and USD / CHF 1.0505, the cross-rate to the Swiss franc, the Japanese Yen is (rounded) is CHF / JPY 99.74.
The second type of calculation is used for currencies with forward and reverse quotations against the US dollar (the US dollar is the base currency for a single currency and the quote currency quotes for the other). Consider the Japanese Yen (JPY) and Australian dollar (AUD). With quotes in relation to the US dollar USD / JPY and AUD / USD is possible, using the properties of fractions, to bring the cross-rate of the Australian dollar to Japanese Yen:
AUD / JPY = AUD / USD * USD / JPY,
that is necessary to multiply the dollar quotation of the Australian dollar in the dollar quotation of Japanese Yen. With, for example, USD / JPY 104.78 and AUD / USD 1.0564, the cross-rate of the Australian dollar to the Japanese Yen will (rounded) equal AUD / JPY 110.69.
The third type of calculation is used for currencies to reverse quotations against the US dollar (the US dollar is the quote currency quotes for both currencies). Consider the British pound sterling (GBP) and Australian dollar (AUD). With quotes in relation to the US dollar GBP / USD and AUD / USD is possible, using the properties of fractions, lead cross-rate of the British pound to the Australian dollar:
GBP / AUD = GBP / USD: AUD / USD,
that is, you must divide the dollar quotation of the pound sterling to the dollar quotation of the Australian dollar. With, for example, GBP / USD 0.5028 and AUD / USD 1.0564, the cross-rate of the British pound to the Australian dollar will (rounded) is GBP / AUD 0.4760.
It should be noted that for ease of calculation formulas, we excluded from consideration of the concept of the purchase price (bid) and selling price (ask) quotes rates and still use only the current (spot) price. But every major (dollar) quotation has two prices, and calculates the cross-exchange rate quotation also has two prices - the so-introduced into the formula where the purchase price, and where the sale price? The answer to this question lies in understanding the logic of calculating cross rates. Returning to the example of the first type of calculation with the Swiss franc (CHF) and Japanese yen (JPY). We are interested in a cross-exchange rate quotation CHF / JPY. To determine the rate of purchase of the Swiss franc in a quote (rates of purchase / sale, as we know, always refer to the base currency) have to argue as follows. We are interested in buying the Swiss franc, it means we must first buy dollars for Japanese yens, and then sell them for Swiss francs. Thus, in USD / JPY quotation course we are interested in buying, and in the quotation USD / CHF selling rate. So buying rate of the Swiss franc against Japanese yen in the quotation of the cross-rate CHF / JPY is calculated as follows:
CHF / JPY (bid) = USD / JPY (bid): USD / CHF (ask)
Similarly, we can calculate the formula for the selling rate of the Swiss franc against Japanese yen in the quotation of the cross-rate CHF / JPY:
CHF / JPY (ask) = USD / JPY (ask): USD / CHF (bid)
For examples of the second and third type of calculation formulas are calculated analogously:
AUD / JPY (bid) = AUD / USD (bid) * USD / JPY (bid),
AUD / JPY (ask) = AUD / USD (ask) * USD / JPY (ask),
GBP / AUD (bid) = GBP / USD (bid): AUD / USD (ask),
GBP / AUD (ask) = GBP / USD (ask): AUD / USD (bid).
It is worth noting that dealers practically do not use these formulas because of their bulkiness. There are more convenient standard way of calculating the buying and selling rates in the quotations of cross-rates at the Forex. This method is as follows. Take the average of the buying and selling rates for each dollar quotations. Then, using the formula for the current (spot) price, calculated the current value of cross-exchange quotes.This value is then "extendible" in opposite directions at a certain number of points (set spread), and thus obtained buying and selling for cross exchange quotation.
Consider the example of Swiss Francs (CHF) and Japanese yen (JPY). Assuming rates of purchase / sale of the currencies against the US dollar following: USD / CHF 1.0502 / 08 and USD / JPY 104.74 / 82. Calculate the average rates:
USD / CHF (avg) = (1.0502 + 1.0508) / 2 = 1.0505,
USD / JPY (avg) = (104.74 + 104.82) / 2 = 104.78,
which are then used in the formulas for calculating quotations of cross-rates for the current (spot) price. The calculated value thus CHF / JPY (avg) 99.74 then "moved apart", say 5 points in both directions, forming a course of buying and selling CHF / JPY 99.69 / 79.
It must be remembered that in such a simplified method of calculation, there are pitfalls. Since money on Forex is earned on the opposite (overlapping) transactions, the value of the spread should be large enough to avoid losses during the reverse transaction with another counterparty.This is especially important for less liquid markets, "exotic" cross rates.
Summarizing the chapter say that the analysis and forecasting of the cross-rates is no different from the analysis and forecasting of core courses in relation to the US dollar, ie, They use the same tools, which will be mentioned in the section School Forex Portal forexanewway
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