In the global Forex market, the exchange rate of currencies depends on one another. Currency cross triangulation involves using a third currency to find the conversion rate and/or to convert two different currencies. Usually this third currency used is a standard currency like US Dollar or Euro; this interim currency is known as triangulation currency.
Currency cross triangulation is needed by major companies, governments, investors, and exporters to transact currencies; especially if they are transacting two non standard currencies. This triangulation process effectively eliminates the need of buying and selling an interim currency. Here is the example. Before the introduction of currency cross triangulation, for an effective conversion of CHF (Swiss Franc) to GBP (British Pound), a company needed to sell CHF to buy USD (US Dollar) and then sell USD to buy GBP. But now they can just use the USD/CHF and GBP/USD exchange rate to find the exchange rate of GPB/CHF.
As evident from the above example, one can find the price of one currency pair by crossing two standard pairs that involve a third currency; the formula is AAA/BBB * CCC/AAA = CCC/BBB. This is especially important because of the fact that many spot currency cross pairs are not traded against each other in the inter-bank market. Often, there can be some small price disparities in cross triangulation which can give rise to opportunities of triangular forex arbitrage, which usually last for a very short time.
NobleTrading.com Offers Online Stock Trading, Online Options Trading,
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
