Business, Legal & Accounting Glossary
The world has become a global village. The nations are trading amongst each other and the old practice of barter trades has largely been eliminated. Now the countries trade in their own respective currencies. However, the correct value of any currency can only be ascertained once it is compared with other major currencies.
This aspect is called cross-currency triangulation and this forms the backbone of the modern economy.
To triangulate means comparing an object from three directions. In terms of the Forex market, cross-currency triangulation means the comparison of currencies. It is a common observation at interbank forex trade that the base pairs of currencies vary a lot and they must therefore be evaluated against some standard currencies.
The adoption of the Euro has given rise to the use of cross-currency triangulation. Now all the countries that have adopted the Euro as a currency use it as a means to assess the status of their respective currency in interstate trade.
The rules formulated in 1997 have made triangulation the basic system for the entire Eurozone. It has also adopted the calculation of conversion of currencies to six and three decimal places. Now the cross currency pairs like GBP/JPY, GBP/CHF, EUR/JPY, and EUR/GBP are commonly traded in the Forex market.
In the period before the adoption of the Euro, any company based in France and operating from the UK had to get the British pounds earned in the UK converted into US Dollars. These were further converted into Franc. Such a lengthy transaction and repeated conversions across all borders were a complication for the investors as the prices of the inter currency fluctuated a lot. However, the adoption of the Euro has ended this menace and now the countries in Euro Zone can trade without these lengthy procedures.
The cross-country triangulations are basically designed to obtain profit from the market fluctuations in rates of various currencies. There are a large number of opportunities once a broker wants to exchange a base pair against another or make a profit by exploiting a number of currency base pairs. The formula used in these is A/B x B/C = C/B.
The broker makes a profit from the exchange rate of each of the above currencies as each currency has its own value based on its demand and supply. In addition, the reverse of the base pairs can also be traded very easily. You can trade GBP/USD or USD/GBP and similarly the EUR/USD or USD/EUR.
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This glossary post was last updated: 13th November, 2021 | 0 Views.