InvestorQ : I want to know about cross currency pairs in the stock market. How can I use them and how to make profit from these pairs?
shrinidhi Rajan made post

I want to know about cross currency pairs in the stock market. How can I use them and how to make profit from these pairs?

Answer
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Riya Dwivedi answered.
12 months ago


Normally, the most actively traded currency pairs are all rupee pairs where one side of the pair transaction is the India rupee. Cross currency pairs are ones that do not have the INR and both the currencies in the pair are foreign currencies. Normally, cross currency pairs are between hard currencies like the US dollar, UK Pound, Euro or Yen and the INR is not involved. Let us now look at how to trade in currency pairs and why to trade them?

Cross currency pairs are currently available on 3 global currencies viz. the USD versus the Pound, Euro and the Yen. In any pair, including the cross currency pair, the first currency is the base currency and the second currency is the quote currency. What it means is that the first currency will be quoted in terms of the quote currency. The table below captures the relevant pairs and the base currencies for the cross currency pairs:

Currency Pair

Base Currency

Quote Currency

EURUSD

Euro

US Dollar

GBPUSD

UK Pound

US Dollar

USDJPY

US Dollar

Japanese Yen

All cross currency pairs are quoted in 1000 units of the base currency in all the above cases. Let me now turn to the application of cross currency pairs in the Indian context.

Who will use cross currency pairs? Take the example of an India company which imports from Germany and then exports to the US. This company will have exposure to the US Dollar and to the Euro. Since the company is importing from Germany it will have to protect against strengthening Euro. So it will have to buy a EURINR pair. At the same time, since the company is exporting to the US it will have to protect against a weakening dollar. So it will have to sell the USDINR pair. An easier way would be to just buy the EURUSD cross currency pair. The company is automatically hedged against a strengthening Euro and also against a weakening US dollar. That is the utility of cross currency pairs. However, you need to be cautious of the liquidity since most cross currency pairs are not too liquid in the currency markets.